What Information Drives Asset Prices?

81 Pages Posted: 9 Aug 2017

See all articles by Anisha Ghosh

Anisha Ghosh

Carnegie Mellon University

George M. Constantinides

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: August 3, 2017


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.

Keywords: macroeconomic news, learning models, CPI, earnings per hour, asset pricing

JEL Classification: E3, G12, G14

Suggested Citation

Ghosh, Anisha and Constantinides, George M., What Information Drives Asset Prices? (August 3, 2017). Chicago Booth Research Paper No. 17-23, Available at SSRN: https://ssrn.com/abstract=3015833 or http://dx.doi.org/10.2139/ssrn.3015833

Anisha Ghosh

Carnegie Mellon University ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
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George M. Constantinides (Contact Author)

University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
United States
773-702-7258 (Phone)
773-752-0458 (Fax)

National Bureau of Economic Research (NBER)

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