Investor Information Choice with Macro and Micro Information

We study information and portfolio choices in a market of securities whose dividends depend on an aggregate (macro) risk factor and idiosyncratic (micro) shocks. Investors can acquire information about dividends at a cost. We... [ view full abstract ]

We study information and portfolio choices in a market of securities whose dividends depend on an aggregate (macro) risk factor and idiosyncratic (micro) shocks. Investors can acquire information about dividends at a cost. We establish a general result showing that investors endogeneously specialize in either macro or micro information. We then develop a specific model with this specialization and study the equilibrium mix of macro-informed and micro-informed investors and the informativeness of macro and micro prices. We discuss empirical implications for price volatility and covariance. Our results favor Samuelson's dictum, that markets are more micro efficient than macro efficient.