Year: 2010
Type: article
Abstract: This paper investigates the relation between information on the state of the economy and equity risk premium. We use a setup where investors have Epstein-Zin preferences and the economy randomly switches between booms and recessions. We are able to establish 2 key results: First, investors with high elasticity of intertemporal substitution (EIS) will require lower excess returns for holding stocks if they are provided with better information on the state of the economy. Second, we find that this also holds for investors with moderate EIS if they are sufficiently risk averse.
Authors: Frode Brevik, Stefano d’Addona
Institutions: Vrije Universiteit Amsterdam, Baruch College
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W2233873724