Information Quality and Long-Run Risk: Asset Pricing Implications



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    • Hengjie Ai is at the Fuqua School of Business, Duke University. This paper is based on chapter three of my doctoral dissertation at the University of Minnesota. I thank the acting editor, Pietro Veronesi, and an anonymous referee for many constructive criticisms. I thank Ravi Bansal, Michele Boldrin, Michael Brandt, V.V. Chari, Qi Chen, James Choi, Robert Goldstein, Larry Jones, Narayana Kocherlakota, David Levine, Erzo Luttmer, Ellen McGrattan, Martin Schneider, Jan Werner, Ofer Zeitouni, and participants at numerous seminars and conferences for helpful comments. Financial support from the Graduate School Dissertation Fellowship of the University of Minnesota is gratefully acknowledged. All errors are mine.


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.