Common Factors, Information, and Holdings Dispersion. (30th June 2017)

• Record Type: Journal Article
• Authors: Fontaine, Patrice; Jimenez-Garcès, Sonia; Seasholes, Mark S
• Is Part Of: Review of finance. Volume 22:Number 4(2018)
• Page Start: 1441
• Page End: 1467
• Publication Date: 2017-06-30
• Subjects: D82 -- G11 -- G12 -- G15; Information economics -- Holdings dispersion -- Home bias; Finance -- Europe -- Periodicals; Financiën; Finance; Periodicals; 332.09405
• DOI: 10.1093/rof/rfx030
• Languages: English
• ISSNs: 1572-3097

Abstract

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.