Can an 'Estimation Factor' Help Explain Cross-Sectional Returns?
32 Pages Posted: 8 Jan 2005 Last revised: 13 Jan 2009
Date Written: Jan 12, 2009
Abstract
We show in a theoretical model that the expected excess return on any asset depends on its covariance not only with the market portfolio, but also with changes in the representative agent's estimate. We test our model using GMM and compare it to the CAPM. The results suggest that adding an "estimation factor" to the CAPM helps explain cross-sectional returns and that, unconditionally, this estimation factor carries a negative risk premium.
Keywords: Learning, incomplete information, equilibrium, asset pricing models
JEL Classification: C13, G12
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Incomplete Information Equilibria: Separation Theorems and Other Myths
-
Incomplete Information Equilibria: Separation Theorems and Other Myths
-
Production and the Real Rate of Interest: A Sample Path Equilibrium
-
Simple Construction of the Efficient Frontier
By David Feldman and Haim Reisman
-
Simple Construction of the Efficient Frontier
By David Feldman and Haim Reisman
-
Is Learning a Dimension of Risk?
By Massimo Massa and Andrei Simonov
-
The Effect of Information Quality on Optimal Portfolio Choice
-
Belief-Dependent Utilities, Aversion to State-Uncertainty and Asset Prices
-
Belief-Dependent Utilities, Aversion to State-Uncertainty and Asset Prices