Information and the Equity Premium

27 Pages Posted: 9 Sep 2002

See all articles by Christian Gollier

Christian Gollier

University of Toulouse 1 - Industrial Economic Institute (IDEI); CESifo (Center for Economic Studies and Ifo Institute)

Edward E. Schlee

Arizona State University

Date Written: August 2006

Abstract

We consider the effect of information on the ex ante average risk-free rate and the equity premium in a standard exchange economy with a representative agent. We show that information always increases the average risk-free rate. Clearly, perfect information eliminates the equity premium; moreover, we show that a particular kind of information about the level of the return to equity always decreases the average equity premium. Surprisingly, however, information must sometimes raise the ex ante premium, no matter what the preferences of the representative agent; and information purey about the volatility of the return always raises the equity premium for a interesting class of preferences. We consider two different economies: a two-period model with arbitrary preferences for the representative agent; and an infinite horizon model with additive separable CES utility with independent growth rates.

Keywords: Information, Asset Prices, Risk-Free Rate, Equity Premium

JEL Classification: D8, D9, G12

Suggested Citation

Gollier, Christian and Schlee, Edward E., Information and the Equity Premium (August 2006). Available at SSRN: https://ssrn.com/abstract=328580 or http://dx.doi.org/10.2139/ssrn.328580

Christian Gollier

University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )

Manufacture des Tabacs
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Toulouse Cedex, F-31000
France
+33 61 12 86 30 (Phone)
+33 61 12 86 37 (Fax)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Edward E. Schlee (Contact Author)

Arizona State University ( email )

Box 873806
Tempe, AZ 85287-3806
United States
480-965-5745 (Phone)
480-965-0748 (Fax)

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