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How Does Information Quality Affect Stock Returns?

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Author Info
Pietro Veronesi (University of Chicago)
Abstract

Using a simple dynamic asset pricing model, this paper investigates the relationship between the precision of public information about economic growth and stock market returns. After fully characterizing expected returns and conditional volatility, I show that (i) higher precision of signals tends to increase the risk premium, (ii) when signals are imprecise the equity premium is "bounded above" independently of investors' risk aversion, (iii) return volatility is U-shaped with respect to investors' risk aversion, and (iv) the relationship between conditional expected returns and conditional variance is ambiguous. Copyright The American Finance Association 2000.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 55 (2000)
Issue (Month): 2 (04)
Pages: 807-837
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Handle: RePEc:bla:jfinan:v:55:y:2000:i:2:p:807-837

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  1. Günter Franke & Erik Lüders, 2005. "Return Predictability and Stock Market Crashes in a Simple Rational Expectations Model," CoFE Discussion Paper 05-05, Center of Finance and Econometrics, University of Konstanz. [Downloadable!]
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  2. Larry Epstein & Martin Schneider, 2005. "Ambiguity, Information Quality and Asset Pricing," RCER Working Papers 519, University of Rochester - Center for Economic Research (RCER). [Downloadable!]
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  3. Edward Schlee & Christian Gollier, . "Information and the Equity Premium," Working Papers 2133505, Department of Economics, W. P. Carey School of Business, Arizona State University. [Downloadable!]
    Other versions:
  4. Pástor, Lubos & Sinha, Meenakshi & Swaminathan, Bhaskaran, 2006. "Estimating the Intertemporal Risk-Return Tradeoff Using the Implied Cost of Capital," CEPR Discussion Papers 5462, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. Tano Santos & Pietro Veronesi, 2004. "Conditional Betas," NBER Working Papers 10413, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Lars Peter Hansen, 2007. "Beliefs, Doubts and Learning: Valuing Economic Risk," NBER Working Papers 12948, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Lundtofte, Frederik, 2005. "Can An ”Estimation Factor” Help Explain Cross-Sectional Returns?," Working Papers 2005:18, Lund University, Department of Economics. [Downloadable!]
  8. Lüders, Erik & Peisl, Bernhard, 2001. "How do investors' expectations drive asset prices?," ZEW Discussion Papers 01-15, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
  9. Basak, Suleyman, 2004. "Asset Prices with Heterogenous Beliefs," CEPR Discussion Papers 4256, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  10. Herve Roche, 2004. "Optimum Consumption and Portfolio Allocations under Incomplete Information," Econometric Society 2004 Latin American Meetings 79, Econometric Society. [Downloadable!]
  11. Sbuelz, A. & Trojani, F., 2002. "Equilibrium asset pricing with time-varying pessimism," Discussion Paper 102, Tilburg University, Center for Economic Research. [Downloadable!]
  12. Fabio Trojani & Markus Leippold & Paolo Vanini, 2005. "Learning and Asset Prices under Ambiguous Information," University of St. Gallen Department of Economics working paper series 2005 2005-03, Department of Economics, University of St. Gallen. [Downloadable!]
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