Risk aversion, investor information and stock market volatility

Kevin Lansing and Stephen LeRoy

European Economic Review, 2014, vol. 70, issue C, 88-107

Abstract: This paper employs a standard asset pricing model to derive theoretical volatility measures in a setting that allows for varying degrees of investor information about the dividend process. We show that the volatility of the price–dividend ratio increases monotonically with investor information but the relationship between investor information and equity return volatility (or equity premium volatility) can be non-monotonic, depending on risk aversion and other parameter values. Under some plausible calibrations and information assumptions, we show that the model can match the standard deviations of equity market variables in long-run U.S. data. In the absence of concrete knowledge about investors׳ information, it becomes more difficult to conclude that observed volatility in the data is excessive.

Keywords: Asset pricing; Excess volatility; Variance bounds; Risk aversion; Imperfect information (search for similar items in EconPapers)
JEL-codes: E44 G12 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:70:y:2014:i:c:p:88-107

DOI: 10.1016/j.euroecorev.2014.03.009

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