TY  - JOUR
AU  - Croce, Mariano M
AU  - Lettau, Martin
AU  - Ludvigson, Sydney C
TI  - Investor Information, Long-Run Risk, and the Term Structure of Equity
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12912
PY  - 2007
Y2  - February 2007
DO  - 10.3386/w12912
UR  - http://www.nber.org/papers/w12912
L1  - http://www.nber.org/papers/w12912.pdf
N1  - Author contact info:
Mariano Max Croce
Bocconi University
	Milan
ITALY
E-Mail: mmc287@gmail.com

Martin Lettau
Haas School of Business
University of California, Berkeley
545 Student Services Bldg. #1900
Berkeley, CA 94720-1900
Tel: 510/642-6349
Fax: 510/643-1412
E-Mail: lettau@haas.berkeley.edu

Sydney C. Ludvigson
Department of Economics
New York University
19 W. 4th Street, 6th Floor
New York, NY  10002
Tel: 212/998-8927
Fax: 212/995-4186
E-Mail: sydney.ludvigson@nyu.edu
AB  - We study the role of information in asset pricing models with long-run cash flow risk. When investors can distinguish short- from long-run consumption risks (full information), the model generates a sizable equity risk premium only if the equity term structure slopes up, contrary to the data. In general, the short- and long-run components are unidentified. We propose a sparsity-based bounded rationality model of long-run risk that is both parsimonious and fully identified from historical data. In contrast to full information, the model generates a sizable market risk premium simultaneously with a downward sloping equity term structure, as in the data.
ER  -