Information Acquisition and Under-Diversification

Stijn Van Nieuwerburgh and Laura Veldkamp

No 13904, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: If an investor wants to form a portfolio of risky assets and can exert effort to collect information on the future value of these assets before he invests, which assets should he learn about? The best assets to acquire information about are ones the investor expects to hold. But the assets the investor holds depend on the information he observes. We build a framework to solve jointly for investment and information choices, with a variety of preferences and information cost functions. Although the optimal research strategies depend on preferences and costs, the main result is that the investor who can first collect information systematically deviates from holding a diversified portfolio. Information acquisition can rationalize investing in a diversified fund and a concentrated set of assets, an allocation often observed, but usually deemed anomalous.

JEL-codes: D82 D83 G11 G14 (search for similar items in EconPapers)
Date: 2008-03
New Economics Papers: this item is included in nep-dge
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Published as Stijn Van Nieuwerburgh & Laura Veldkamp, 2010. "Information Acquisition and Under-Diversification," Review of Economic Studies, Blackwell Publishing, vol. 77(2), pages 779-805, 04.

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Journal Article: Information Acquisition and Under-Diversification (2010)
Working Paper: Information Acquisition and Under-Diversification (2008)
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