Common Factors, Information, and Holdings Dispersion

Patrice Fontaine, Sonia Jimenez-Garcès and Mark S Seasholes

Review of Finance, 2018, vol. 22, issue 4, 1441-1467

Abstract: We derive closed-form solutions for asset prices and portfolio holdings when agents have asset-specific information and/or information about common components that affect many assets. Our solutions are general, encompass existing information structures, and are used to analyze new structures. A given investor’s portfolio can exhibit highly disperse holdings—e.g., portfolio weights may vary significantly from market capitalization weights. Our model also generates large ranges of asset prices due to information asymmetries. We help explain why US investors (e.g.) may underweight German stocks (e.g.) on average, but overweight a particular German stock relative to its market capitalization weight.

Keywords: Information economics; Holdings dispersion; Home bias (search for similar items in EconPapers)
JEL-codes: D82 G11 G12 G15 (search for similar items in EconPapers)
Date: 2018
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