Noisy information and stock market returns. Issue 3 (1st August 2016)

• Record Type: Journal Article
• Authors: Li, Gang
• Editors: Wagner, NiklasF; Wagner, NiklasF
• Is Part Of: Studies in economics and finance. Volume 33:Issue 3(2016)
• Publication Date: 2016-08-01
• Subjects: Economics -- Periodicals; Finance -- Periodicals; 330
• DOI: 10.1108/SEF-04-2015-0101
• Languages: English
• ISSNs: 1086-7376

Abstract

Abstract : Purpose: This paper studies whether noisy public information that investors receive about the expected aggregate dividend growth rate can help better understand the large average equity premium and stock return volatility in the US financial market. Design/methodology/approach: We consider a dynamic asset pricing model with a representative agent, who cannot observe the expected growth rate of dividends and must learn its value by using noisy information. In addition, we present a simple model for noisy information calibration. Findings: With a coefficient of relative risk aversion below 10 and the time impatience parameter between 0 and 1, our calibrated model is able to yield an average risk-free interest rate, equity premium and stock return volatility that are close to the stylized facts in the US financial market. Originality/value: First, we present a different equilibrium model with a simple "catching up with the Joneses" preference and noisy information. Second, we develop a simple calibration procedure to calibrate the information process to study whether the calibrated model can help explain the large average equity premium and stock return volatility in the US financial market data.