How does Information Quality Affect Stock Returns?
University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
CRSP Working Paper No. 462
Using a simple dynamic asset pricing model, this paper investigates the relationship between the precision of public information about economic growth and stock market returns. After characterizing expected returns and conditional volatility in terms of a single quantity that depends on investors' uncertainty, I also show that (i) higher precision of signals tends to increase the equity risk premium; (ii) if signals are imprecise, there is an upper bound to the equity premium independently of investors' risk aversion and (iii) return volatility is U-shaped with respect to investors' risk aversion; (iv) a higher precision of signals makes (ii) and (iii) less important.
Number of Pages in PDF File: 44
JEL Classification: G0
Date posted: September 11, 1998