Asset market equilibrium under rational inattention

Jianjun Miao and Dongling Su
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Dongling Su: Boston University

Economic Theory, 2023, vol. 75, issue 1, No 1, 30 pages

Abstract: Abstract We propose a noisy rational expectations equilibrium model of asset markets with rationally inattentive investors. We incorporate any finite number of assets with arbitrary correlation. We also do not restrict the signal form and show that investors optimally choose a single signal, which is a noisy linear combination of all risky assets. This generates comovement of asset prices and contagion of shocks, even when asset payoffs are negatively correlated. The model also provides testable predictions of the impact of risk aversion, aggregate risk, and information capacity on the security market line, the portfolio dispersion, and the abnormal return.

Keywords: Rational inattention; Information choice; Asset pricing; Portfolio choice; D82; G11; G12 (search for similar items in EconPapers)
Date: 2023
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Working Paper: Asset Market Equilibrium under Rational Inattention (2019)
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DOI: 10.1007/s00199-021-01396-z

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