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What Information Drives Asset Prices?

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  • Anisha Ghosh
  • George M. Constantinides

Abstract

The market price-dividend ratio is highly correlated with several macroeconomic variables, particularly inflation and labor market variables, but not with aggregate consumption and GDP. We incorporate this observation in an exchange economy with learning about the economic regime from consumption history and a latent signal. The estimated model rationalizes the moments of consumption and dividend growth, market return, price-dividend ratio, and real and nominal term structures and the low predictive power of the price-dividend ratio for consumption and dividend growth while a nested model with learning from consumption history alone does not. The intuition is that the beliefs process has high persistence and low variance because beliefs depend on the signal. The model fit remains largely intact when we replace the latent signal with a combination of macroeconomic variables that heavily loads on inflation and labor market variables. The results highlight the informational role of macroeconomic variables and suggest that just one combination of macroeconomic variables, along with consumption, proxies well for investors’ relevant information set.

Suggested Citation

  • Anisha Ghosh & George M. Constantinides, 2017. "What Information Drives Asset Prices?," NBER Working Papers 23689, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23689
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    References listed on IDEAS

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    Cited by:

    1. Dergunov, Ilya & Meinerding, Christoph & Schlag, Christian, 2019. "Extreme inflation and time-varying consumption growth," Discussion Papers 16/2019, Deutsche Bundesbank.
    2. Dergunov, Ilya & Meinerding, Christoph & Schlag, Christian, 2022. "Extreme inflation and time-varying expected consumption growth," SAFE Working Paper Series 334, Leibniz Institute for Financial Research SAFE.
    3. Ilya Dergunov & Christoph Meinerding & Christian Schlag, 2023. "Extreme Inflation and Time-Varying Expected Consumption Growth," Management Science, INFORMS, vol. 69(5), pages 2972-3002, May.
    4. John List & Harald Uhlig, 2017. "Introduction," Journal of Political Economy, University of Chicago Press, vol. 125(6), pages 1723-1727.
    5. Ufuk Akcigit & Fernando Alvarez & Stephane Bonhomme & George M Constantinides & Douglas W Diamond & Eugene F Fama & David W Galenson & Michael Greenstone & Lars Peter Hansen & Uhlig Harald & James J H, 2017. "The Past, Present, and Future of Economics: A Celebration of the 125-Year Anniversary of the JPE and of Chicago Economics," Natural Field Experiments 00635, The Field Experiments Website.
    6. George M. Constantinides, 2017. "Asset Pricing: Models and Empirical Evidence," Journal of Political Economy, University of Chicago Press, vol. 125(6), pages 1782-1790.

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    More about this item

    JEL classification:

    • D00 - Microeconomics - - General - - - General
    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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