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Information Quality and Long-Run Risk: Asset Pricing Implications

HENGJIE AI
The Journal of Finance
Vol. 65, No. 4 (AUGUST 2010), pp. 1333-1367
Published by: Wiley for the American Finance Association
Stable URL: http://www.jstor.org/stable/40864913
Page Count: 35
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Information Quality and Long-Run Risk: Asset Pricing Implications
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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.

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