Information Aggregation and Asymmetric Returns

Elias Albagli, Christian Hellwig and Aleh Tsyvinski

No 15644, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study noisy aggregation of dispersed information in financial markets beyond the usual parametric restrictions imposed on preferences, information, and return distributions. This allows a general characterization of asset returns by means of a risk-neutral probability measure that features excess weight on tail risks. Using this characterization, we show that noisy aggregation of dispersed information provides a unified explanation for several prominent cross-sectional return anomalies such as returns to skewness, returns to disagreement and interaction effects between the two. Moreover, this characterization can be linked to observable moments such as forecast dispersion and accuracy, and simple calibrations suggest the model can account for a significant fraction of empirical return anomalies.

Date: 2022-06
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