NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Working Papers by Mariano Max. Croce

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Working Papers

February 2007Investor Information, Long-Run Risk, and the Duration of Risky Cash-Flows
with Martin Lettau, Sydney C. Ludvigson: w12912
We study the role of information in asset pricing models with long-run cash flow risk. To illustrate the importance of the information structure, we show how the implications of the long-run risk paradigm for the cross-sectional properties of stock returns and cash flow duration are affected by information. When investors can fully distinguish short- and long- run consumption risk components of dividend growth innovations (full information), only exposure to long-run consumption risk generates significant risk premia, implying that high-return value stocks are long-duration assets, contrary to the historical data. By contrast, when investors observe the change in consumption and dividends each period but not the individual components of that change (limited information), exposure to short-...

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