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Learning with Information Capacity Constraints

Published online by Cambridge University Press:  06 April 2009

Lin Peng
Lin Peng
Affiliation:
[email protected], Department of Economics and Finance, Zicklin School of Business, Baruch College, City University of New York, One Bernard Baruch Way, Box B10–225, New York, NY 10010.
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Abstract

Motivated by the fact that investors have limited time and attention to process information, this paper provides a continuous-time equilibrium model to analyze the effects of a capacity constraint in the learning process of a representative investor, who optimally allocates her information capacity across multiple sources of uncertainty. Consequently, the cross-sectional structure of information and the resulting asset price dynamics are determined endogenously. The model provides implications on both consumption behavior and the cross-sectional differences in price informativeness in terms of supply of information, speed of price adjustments to fundamental shocks, and price reactions to firm disclosures.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 40 , Issue 2 , June 2005 , pp. 307 - 329
Copyright
Copyright © School of Business Administration, University of Washington 2005

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