Long-Run versus Short-Run News and the Term Structure of Equity

We study the impact of rational learning on the term structures of equity risk premia and bond yields when the quality of available information about short-run and long-run news is asymmetric. Under full information, the model yields empirically inconsistent equity risk premia and bond yields that are respectively increasing and decreasing with the horizon. Under partial information, the more available information concerns short-run news, (i) the better the model conforms with the data and eventually leads to downward-sloping equity risk premia and upward-sloping bond yields, and (ii) the better the model accommodates the risk-free rate and equity premium puzzle.