Information Inertia

65 Pages Posted: 16 Jun 2012 Last revised: 11 Aug 2020

See all articles by Philipp K. Illeditsch

Philipp K. Illeditsch

Texas A&M University - Mays Business School - Finance Department

Jayant V. Ganguli

University of Essex - Department of Economics

Scott Condie

Brigham Young University - Department of Economics

Date Written: March 2, 2020

Abstract

We show that aversion to risk and ambiguity leads to information inertia when investors process public news about assets. Optimal portfolios do not always depend on news that is worse than expected; hence, the equilibrium stock price does not reflect this bad news. This informational inefficiency is more severe when there is more risk and ambiguity but disappears when investors are risk neutral or the news is about idiosyncratic risk. Information inertia leads to news momentum (e.g. after earnings announcements) and is consistent with low trading activity of households. An ambiguity premium helps explain the macro and earnings announcement premium.

Keywords: Ambiguity Aversion, Knightian Uncertainty, Inattention to News, Informational Efficiency, Information Inertia, News Momentum, Post-Earnings Announcement Drift (PEAD), Post-Forecast Revision Drift (PFRD)

JEL Classification: D80, D81, G10, G11, G12, G14

Suggested Citation

Illeditsch, Philipp K. and Ganguli, Jayant V. and Condie, Scott, Information Inertia (March 2, 2020). Journal of Finance, Forthcoming, Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=2084683 or http://dx.doi.org/10.2139/ssrn.2084683

Philipp K. Illeditsch (Contact Author)

Texas A&M University - Mays Business School - Finance Department ( email )

Wehner Building 351Q
4113 TAMU | 210 Olsen Blvd
College Station, TX Brazos County 77843-4218
United States

HOME PAGE: http://https://sites.google.com/view/philippilleditsch

Jayant V. Ganguli

University of Essex - Department of Economics ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

Scott Condie

Brigham Young University - Department of Economics ( email )

130 Faculty Office Bldg.
Provo, UT 84602-2363
United States

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