Index Investing and Asset Pricing under Information Asymmetry and Ambiguity Aversion

David Hirshleifer, Chong Huang and Siew Hong Teoh

No 24143, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In a setting with information asymmetry and a tradable value-weighted market index, ambiguity averse investors hold undiversified portfolios, and assets have nonzero alphas. But when a passive fund offers the risk-adjusted market portfolio (RAMP), whose weights depend on information precisions as well as market values, all investors hold the same portfolios as in the economy without model uncertainty and thus engage in index investing. So RAMP improves participation and risk sharing. Asset alphas are zero with RAMP as pricing portfolio. RAMP can be implemented by a fund of funds even if no manager individually has sufficient knowledge to do so.

JEL-codes: F3 G11 G12 G14 G15 G4 G41 (search for similar items in EconPapers)
Date: 2017-12
New Economics Papers: this item is included in nep-mic and nep-upt
Note: AP IFM
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Citations: View citations in EconPapers (2)

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