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Information Quality and Stock Returns Revisited

  • Brevik, Frode
  • d’Addona, Stefano

This paper investigates the relation between information on the state of the economy and equity risk premium. We use a setup where investors have Epstein-Zin preferences and the economy randomly switches between booms and recessions. We are able to establish 2 key results: First, investors with high elasticity of intertemporal substitution (EIS) will require lower excess returns for holding stocks if they are provided with better information on the state of the economy. Second, we find that this also holds for investors with moderate EIS if they are sufficiently risk averse.

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Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

Volume (Year): 45 (2011)
Issue (Month): 06 (January)
Pages: 1419-1446

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Handle: RePEc:cup:jfinqa:v:45:y:2011:i:06:p:1419-1446_00
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