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How Does Information Quality Affect Stock Returns?
Author(s) -
Veronesi Pietro
Publication year - 2000
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00227
Subject(s) - econometrics , economics , volatility (finance) , conditional variance , capital asset pricing model , stock (firearms) , equity premium puzzle , risk aversion (psychology) , equity (law) , risk premium , financial economics , expected return , stock market , autoregressive conditional heteroskedasticity , expected utility hypothesis , portfolio , mechanical engineering , paleontology , horse , political science , law , engineering , biology
Using a simple dynamic asset pricing model, this paper investigates the relationship between the precision of public information about economic growth and stock market returns. After fully characterizing expected returns and conditional volatility, I show that (i) higher precision of signals tends to increase the risk premium, (ii) when signals are imprecise the equity premium is bounded above independently of investors' risk aversion, (iii) return volatility is U‐shaped with respect to investors' risk aversion, and (iv) the relationship between conditional expected returns and conditional variance is ambiguous.