Can An 'Estimation Factor' Help Explain Cross-Sectional Returns? |
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| Authors: | Frederik Lundtofte |
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| Affiliation: | The author is from the Department of Economics, Lund University, Sweden. He thanks Andrew Stark (editor), an anonymous referee, Michael Brennan, David Feldman, Björn Hansson, Carsten Sørensen, Fabio Trojani, Anders Vilhelmsson and Yihong Xia for helpful discussions. Financial support from the Jan Wallander and Tom Hedelius Foundation (grant W2005-0365:1), Bankforskningsinstitutet and the Swiss National Science Foundation (NCCR FINRISK and grant 100012-105745/1) is gratefully acknowledged. |
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| Abstract: | 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. |
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| Keywords: | learning incomplete information equilibrium asset pricing models |
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