Disagreement, Information Quality and Asset Prices

102 Pages Posted: 4 Dec 2019 Last revised: 22 Sep 2023

See all articles by Costas Xiouros

Costas Xiouros

BI Norwegian Business School

Fernando Zapatero

Boston University - Questrom School of Business

Date Written: October 30, 2019

Abstract

We present an analytical solution for a pure exchange economy featuring a continuum of agents with disagreement, time-varying information quality, and reference-dependent preferences. Our general equilibrium model exhibits stationary dynamics. By examining the implications of the model, we find that the commonly studied asset pricing channels of disagreement have limited quantitative significance. On the other hand, variations in information quality, which affect disagreement levels, lead to substantial excess stock price volatility. This finding contributes significantly to explaining the equity premium and sheds light on empirical relationships between forecast dispersion and asset prices, the upward sloping real yield curve, and long-term yield movements.

Keywords: Asset Prices, Heterogeneous Expectations, Information Quality, Habit-Formation Preferences

JEL Classification: G10, G12

Suggested Citation

Xiouros, Costas and Zapatero, Fernando, Disagreement, Information Quality and Asset Prices (October 30, 2019). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3489502 or http://dx.doi.org/10.2139/ssrn.3489502

Costas Xiouros

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Fernando Zapatero (Contact Author)

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

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