Asset Market Equilibrium under Rational Inattention
Jianjun Miao () and
No WP2019-09, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics
We propose a noisy rational expectations equilibrium model of asset markets with rationally inattentive investors. We extend the literature to incorporate any finite number of assets with arbitrary correlation. We also do not restrict the signal form and show that investors optimality 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 (search for similar items in EconPapers)
JEL-codes: D82 G11 G12 (search for similar items in EconPapers)
Pages: 33 pages
New Economics Papers: this item is included in nep-ore and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:bos:wpaper:wp2019-009
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