The Journal of Finance

How Does Information Quality Affect Stock Returns?

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00227

Pietro Veronesi

Using a simple dynamic asset pricing model, this paper investigates the relationship between the precision of public information about economic growth and stock market returns. After fully characterizing expected returns and conditional volatility, I show that (i) higher precision of signals tends to increase the risk premium, (ii) when signals are imprecise the equity premium is bounded above independently of investors' risk aversion, (iii) return volatility is U‐shaped with respect to investors' risk aversion, and (iv) the relationship between conditional expected returns and conditional variance is ambiguous.

Uncertainty about Government Policy and Stock Prices

Published: 07/19/2012   |   DOI: 10.1111/j.1540-6261.2012.01746.x

L̆UBOS̆ PÁSTOR, PIETRO VERONESI

We analyze how changes in government policy affect stock prices. Our general equilibrium model features uncertainty about government policy and a government whose decisions have both economic and noneconomic motives. The model makes numerous empirical predictions. Stock prices should fall at the announcement of a policy change, on average. The price decline should be large if uncertainty about government policy is large, and also if the policy change is preceded by a short or shallow economic downturn. Policy changes should increase volatilities and correlations among stocks. The jump risk premium associated with policy decisions should be positive, on average.

Inequality Aversion, Populism, and the Backlash against Globalization

Published: 09/14/2021   |   DOI: 10.1111/jofi.13081

ĽUBOŠ PÁSTOR, PIETRO VERONESI

Motivated by the recent rise of populism in Western democracies, we develop a tractable equilibrium model in which a populist backlash emerges endogenously in a strong economy. In the model, voters dislike inequality, especially the high consumption of “elites.” Economic growth exacerbates inequality due to heterogeneity in preferences , which leads to heterogeneity in returns on capital. In response to rising inequality, voters optimally elect a populist promising to end globalization. Equality is a luxury good. Countries with more inequality, higher financial development, and trade deficits are more vulnerable to populism, both in the model and in the data.

Stock Valuation and Learning about Profitability

Published: 09/11/2003   |   DOI: 10.1111/1540-6261.00587

Ľuboš Pástor, Veronesi Pietro

We develop a simple approach to valuing stocks in the presence of learning about average profitability. The market‐to‐book ratio (M/B) increases with uncertainty about average profitability, especially for firms that pay no dividends. M/B is predicted to decline over a firm's lifetime due to learning, with steeper decline when the firm is young. These predictions are confirmed empirically. Data also support the predictions that younger stocks and stocks that pay no dividends have more volatile returns. Firm profitability has become more volatile recently, helping explain the puzzling increase in average idiosyncratic return volatility observed over the past few decades.

Rational IPO Waves

Published: 08/12/2005   |   DOI: 10.1111/j.1540-6261.2005.00778.x

ĽUBOŠ PÁSTOR, PIETRO VERONESI

We argue that the number of firms going public changes over time in response to time variation in market conditions. We develop a model of optimal initial public offering (IPO) timing in which IPO waves are caused by declines in expected market return, increases in expected aggregate profitability, or increases in prior uncertainty about the average future profitability of IPOs. We test and find support for the model's empirical predictions. For example, we find that IPO waves tend to be preceded by high market returns and followed by low market returns.

The Price of Political Uncertainty: Theory and Evidence from the Option Market

Published: 03/01/2016   |   DOI: 10.1111/jofi.12406

BRYAN KELLY, ĽUBOŠ PÁSTOR, PIETRO VERONESI

We empirically analyze the pricing of political uncertainty, guided by a theoretical model of government policy choice. To isolate political uncertainty, we exploit its variation around national elections and global summits. We find that political uncertainty is priced in the equity option market as predicted by theory. Options whose lives span political events tend to be more expensive. Such options provide valuable protection against the price, variance, and tail risks associated with political events. This protection is more valuable in a weaker economy and amid higher political uncertainty. The effects of political uncertainty spill over across countries.