DP15644 Dispersed Information and Asset Prices

Author(s): Elias Albagli, Christian Hellwig, Aleh Tsyvinski
Publication Date: January 2021
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15644

Abstract We argue 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 corporate credit spreads. We characterize asset returns with noisy information aggregation by means of a risk-neutral probability measure that features excess weight on tail risks, and link the latter to observable moments of earnings forecasts, in particular forecast dispersion and accuracy. We calibrate our model to match these moments and show that it accounts for a large fraction of the empirical return premia. We further develop asset pricing tools for noisy information aggregation models that do not impose strong parametric restrictions on economic primitives such as preferences, information, or return distributions.