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Information Quality and Long‐Run Risk: Asset Pricing Implications

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  • HENGJIE AI

Abstract

I study the asset pricing implications of the quality of public information about persistent productivity shocks in a general equilibrium model with Kreps–Porteus preferences. Low information quality is associated with a high equity premium, a low volatility of consumption growth, and a low volatility of the risk‐free interest rate. The relationship between information quality and the equity premium differs from that in endowment economies. My calibration improves substantially upon the Bansal–Yaron model in terms of the moments of the wealth–consumption ratio and the return on aggregate wealth.

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  • Hengjie Ai, 2010. "Information Quality and Long‐Run Risk: Asset Pricing Implications," Journal of Finance, American Finance Association, vol. 65(4), pages 1333-1367, August.
    • Handle: RePEc:bla:jfinan:v:65:y:2010:i:4:p:1333-1367
    DOI: 10.1111/j.1540-6261.2010.01572.x
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