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How Does Information Quality Affect Stock Returns?

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  • Pietro Veronesi

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.

Suggested Citation

  • Pietro Veronesi, 2000. "How Does Information Quality Affect Stock Returns?," Journal of Finance, American Finance Association, vol. 55(2), pages 807-837, April.
  • Handle: RePEc:bla:jfinan:v:55:y:2000:i:2:p:807-837
    DOI: 10.1111/0022-1082.00227
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    File URL: https://doi.org/10.1111/0022-1082.00227
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