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Information Quality and Stock Returns Revisited

Published online by Cambridge University Press:  17 September 2010

Frode Brevik  and
Stefano d’Addona
Frode Brevik
Affiliation:
VU University Amsterdam, De Boelelaan 1105, 1081 Amsterdam, Netherlands. fbrevik@feweb.vu.nl
Stefano d’Addona
Affiliation:
University of Rome 3, Via G. Chiabrera, 199, I-00145 Rome, Italy, and Baruch College–City University of New York, One Bernard Baruch Way, New York, NY 10010. daddona@uniroma3.it
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Abstract

This paper investigates the relation between information on the state of the economy and equity risk premium. We use a setup where investors have Epstein-Zin preferences and the economy randomly switches between booms and recessions. We are able to establish 2 key results: First, investors with high elasticity of intertemporal substitution (EIS) will require lower excess returns for holding stocks if they are provided with better information on the state of the economy. Second, we find that this also holds for investors with moderate EIS if they are sufficiently risk averse.

Information

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 45 , Issue 6 , December 2010 , pp. 1419 - 1446
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2010

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