The Behavior of Individual and Aggregate Stock Prices

39 Pages Posted: 12 Jan 2004

Date Written: February 2007


News about an individual stock normally has only a trivial impact on the aggregate economy. The news of the aggregate stock market, however, may have a significant impact on the prospects of the economy, and so has a large impact on the pricing kernel. This difference between the aggregate stock market and individual stocks is analyzed in a dynamic general equilibrium setting with incomplete information. The main findings are as follows. First, consistent with existing empirical evidence, the correlation between stock returns and earnings surprises is, on average, positive at the individual stock level and is lower or even negative at the aggregate level. Second, a stock's return is less sensitive to its earnings surprises if the expected earnings growth of the stock is more pro-cyclical. Third, a decrease of information quality of a stock increases its risk premium if the stock accounts for a small fraction of the economy, but decreases its risk premium if the stock accounts for a large fraction.

Keywords: Learning, Information Quality, Earnings Surprises

JEL Classification: D8, E1, G1

Suggested Citation

Yan, Hongjun, The Behavior of Individual and Aggregate Stock Prices (February 2007). Available at SSRN: or

Hongjun Yan (Contact Author)

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604
United States


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