Antonella Tolomeo (Collegio Carlo Alberto)

“Disentangling Overlapping Shocks in Portfolio Choices”

abstract

In a market where price shocks result from the sum of several mean-reverting shocks, this paper finds the optimal trading policies and their welfare for informed investors, who observe all individual shocks, and uninformed investors, who estimate them from the aggregate shock alone. All investors have constant relative risk aversion. When at least three shocks are present, uninformed investors ascribe more of the price change to shocks with lower frequency. Shocks that are uncorrelated for the informed are rationally perceived as negatively correlated by the uninformed, and their correlation weakens as the difference of their frequencies increases.