Information and the equity premium

Christian Gollier, Edward Schlee

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

We determine how better information affects the average equity premium in a standard representative-agent exchange economy. Perfect information obviously eliminates the equity premium, and a particular kind of information about the level of future consumption always lowers the average equity premium. Surprisingly, information sometimes raises the average equity premium, no matter what the preferences of the representative agent. Information purely about the volatility either of consumption or the marginal utility of consumption raises the equity premium for a wide class of preferences. Moreover, information can raise the average equity premium by an arbitrarily large percentage (while still matching important magnitudes, such as average growth and the risk-free rate). We consider two different economies: a two-period economy with arbitrary preferences for the representative agent; and an infinite horizon economy, in which we restrict both preferences and the endowment distribution.

Original languageEnglish (US)
Pages (from-to)871-902
Number of pages32
JournalJournal of the European Economic Association
Volume9
Issue number5
DOIs
StatePublished - Oct 2011

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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