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Information Quality and Stock Returns Revisited

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  • Frode Brevik

    (St. Gallen University)

  • Stefano d'Addona

    (University of Rome III & Columbia Business School)

Abstract

Building on the seminal work of Veronesi (2000), we investigate the relationship between the quality of information on the state of the economy and equity risk premium. In this, we use a setup where investors have Epstein-Zin preferences and the economy switches between booms and recessions at random intervals (Hamilton, 1989). Calibrating the model to fit the business cycle patterns in the US postwar data, we are able to establish two key results: First, as conjectured in the existing literature, we demonstrate that investors with high intertemporal elasticity of substitution will require lower excess returns for holding stocks if they are provided with better information on the state of the economy. Second, and even more interesting (since not predicted in the literature), we find that this will also hold for investors with a moderate elasticity of intertemporal substitution if they are moderately risk averse.

Suggested Citation

  • Frode Brevik & Stefano d'Addona, 2005. "Information Quality and Stock Returns Revisited," Finance 0511006, EconWPA, revised 26 Mar 2006.
  • Handle: RePEc:wpa:wuwpfi:0511006 Note: Type of Document - pdf
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    References listed on IDEAS

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