Information Precision, Noise, and the Cross-Section of Stock Returns

42 Pages Posted: 28 Jul 2008

See all articles by Radu Burlacu

Radu Burlacu

University of Grenoble 2 - ESA - CERAG

Sonia G. Jimenez-Garcès

University of Angers - Centre de Recherches Appliquées à la Gestion (CERAG)

Mark S. Seasholes

ASU WP Carey School of Business

Patrice C. Fontaine

Eurofidai (CNRS)

Multiple version iconThere are 2 versions of this paper

Date Written: July 28, 2008

Abstract

We derive a cross-sectional asset pricing measure from a noisy multi-asset rational expectations equilibrium model. The measure is based on the time-series covariance of an asset's returns and security prices. Empirically, stocks with a measure one standard deviation above and below the average have returns that di er by 0.36% the following month (4.44% per annum) which is statistically significant at the 1%-level. The findings are concentrated in the smallest three deciles of stocks using NYSE breakpoints. Results remain significant after including variables such as stock market capitalization, book-to-market ratio, and the probability of information-based trading. Our measure can be understood as a proxy for information risk and/or supply uncertainty. The two explanations cannot easily be disentangled.

Keywords: Risk Premia, Cross-Sectional Asset Pricing, REE Models

JEL Classification: D8, G1, G10

Suggested Citation

Burlacu, Radu and Jimenez-Garcès, Sonia G. and Seasholes, Mark S. and Fontaine, Patrice C., Information Precision, Noise, and the Cross-Section of Stock Returns (July 28, 2008). 21st Australasian Finance and Banking Conference 2008 Paper. Available at SSRN: https://ssrn.com/abstract=1181982 or http://dx.doi.org/10.2139/ssrn.1181982

Radu Burlacu

University of Grenoble 2 - ESA - CERAG ( email )

Grenoble
France

Sonia G. Jimenez-Garcès

University of Angers - Centre de Recherches Appliquées à la Gestion (CERAG) ( email )

150 rue de la Chimie, BP47
GRENOBLE CEDEX, 38040
France

Mark S. Seasholes

ASU WP Carey School of Business ( email )

Dept of Finance, BAC 501
400 E. Lemon St.
Tempe, AZ 85287-3906
United States

Patrice C. Fontaine (Contact Author)

Eurofidai (CNRS) ( email )

150, rue de la Chimie - EUROFIDAI UMS CNRS 2748
UGA domaine universitaire
Grenoble Cedex 9, 38058
France

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