Investors are inundated with news about business, politics, and the global economy—and use it to assess the health of the economy, set prices, and forecast returns. But in this flood of information, what in particular are investors paying attention to?
Carnegie Mellon’s Anisha Ghosh and Chicago Booth’s George M. Constantinides find empirical evidence that regardless of what information investors are considering, their focus manifests itself in price-level and labor-market variables.
The researchers start with the market price–dividend ratio, which is an important indicator of investors’ expectations about future dividend growth and discount rates. Many economists believe that the market price–dividend ratio is highly correlated with aggregate consumption growth, but Ghosh and Constantinides find otherwise—they see it as highly correlated with changes in price-level and labor-market variables.