Disagreement, Information Quality and Asset Prices

68 Pages Posted: 4 Dec 2019

See all articles by Costas Xiouros

Costas Xiouros

BI Norwegian Business School

Fernando Zapatero

Questrom School of Business, Boston University

Date Written: October 30, 2019

Abstract

We solve analytically a pure exchange general equilibrium model with a continuum of agents that agree to disagree on how they interpret information. Disagreement fluctuates with information quality and the disagreement model is estimated using data on professional forecasts. We fi nd that fluctuations in information quality generate about half the stock price volatility in the data, helps explain the equity premium, and explains empirical relations between the forecast dispersion and asset prices. Constant information quality cannot account for the variation in forecast dispersion and in this case, disagreement has almost no effect on the stock return volatility.

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). 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)

Questrom School of Business, Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-353-3631 (Phone)

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