In a setting with information asymmetry and a tradable value-weighted market index, ambiguity averse investors hold undiversified portfolios, and assets have non-zero alphas. But when a passive fund offers the risk-adjusted market portfolio (RAMP) whose weights depend on information precisions...

Theories of customer supplier relationships hold that the private information of suppliers about buyers explains the use of trade credit even when there is a competitive banking sector. If suppliers possess private information about their buyers, then the buyer's order size and ability to pay on...

Ambiguity aversion alone does not explain the market nonparticipation puzzle. We show that in a rational expectations equilibrium model with a fund offering the risk-adjusted market portfolio (RAMP), ambiguity averse investors hold the fund and an information-based portfolio, and thus...

We derive a separation theorem: investors hold a common risk-adjusted market portfolio regardless of their information sets, and a portfolio based upon their private signals. This implies that investors have non-negligible holdings of assets they know little about, so nonparticipation remains a...

Theories of customer–supplier relationships propose that the private information that suppliers have about buyers explains why trade credit arises in the presence of a competitive banking sector. However, there is limited evidence that trade creditors possess private information about the...

We offer a model to explain why groups of people sometimes converge upon poor decisions and are prone to fads, even though they can discuss the outcomes of their choices. Models of informational herding or cascades have examined how rational individuals learn by observing predecessors' actions,...