Estimation Risk, Market Efficiency, and the Predictability of Returns / Jonathan Lewellen, Jay Shanken.

Format:

Book

Author/Creator:

Lewellen, Jonathan.

Contributor:

National Bureau of Economic Research.

Shanken, Jay.

Series:

Working Paper Series (National Bureau of Economic Research) no. w7699.

NBER working paper series no. w7699

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2000.

Summary:

In asset pricing, estimation risk refers to investor uncertainty about the parameters of the return or cashflow process. We show that with estimation risk the observable properties of prices and returns can differ significantly from the properties perceived by rational investors. In particular, parameter uncertainty will tend to induce return predictability in ways that resemble irrational mispricing, and prices can violate familiar volatility bounds when investors are rational. Cross-sectionally, expected returns deviate from the CAPM even if investors attempt to hold mean-variance efficient portfolios, and these deviations can be predictable based on past dividends and prices. In short, estimation risk can be important for characterizing and testing market efficiency.

Notes:

Print version record

May 2000.