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Information Quality and Long-Run Risk: Asset Pricing Implications

By HENGJIE AI

Abstract

I study the asset pricing implications of the quality of public information about persistent productivity shocks in a general equilibrium model with Kreps-Porteus preferences. Low information quality is associated with a high equity premium, a low volatility of consumption growth, and a low volatility of the risk-free interest rate. The relationship between information quality and the equity premium differs from that in endowment economies. My calibration improves substantially upon the Bansal-Yaron model in terms of the moments of the wealth-consumption ratio and the return on aggregate wealth. Copyright (c) 2010 the American Finance Association.

DOI identifier: 10.1111/j.1540-6261.2010.01572.x
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