Heterogeneous Beliefs, Limited Participation and Flight-to-Quality

This paper extends the multi-asset model of Huang, Zhang and Zhu (2017) to four types of investors - insider, sophisticated, naive, and noise investors — with different information structures and re-explores the limited participation phenomenon under correlation ambiguity. We investigate whether asset allocations depend on incomplete information under market equilibrium, namely, whether investors with less information could trade more intensively than investors with more information. As correlation coefficient increases and asset quality rises, we find that investors with less information escape from low-quality assets to high-quality assets and investors with more information escape to low-quality assets from high-quality assets. Thus, in equilibrium, all the investors exhibit a flight-to-quality trading pattern.