Financial Equilibrium with Heterogeneous Information Processing Efficiency

Abstract

This paper examines a model where investors varying information processing abilities influence financial market equilibrium through price informativeness. When prices are sufficiently informative, high-efficiency investors specialize in high-signal-efficiency assets, while low-efficiency investors rely on price information and specialize in low-signal-efficiency assets. Consequently, assets with low signal efficiency exhibit higher risk premiums compared to those with high signal efficiency. This suggests that individuals with lower information processing efficiency may hold more small stocks with less efficient signals, potentially leading to higher risk premiums in small stocks compared to larger ones, driven by informationrelated factors.