Estimation Risk, Market Efficiency, and the Predictability of Returns

49 Pages Posted: 19 Dec 2000

See all articles by Jay A. Shanken

Jay A. Shanken

Emory University - Goizueta Business School; National Bureau of Economic Research (NBER)

Jonathan Lewellen

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2000

Abstract

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 empirical properties of prices and returns can differ significantly from the properties perceived by rational investors. As a consequence, parameter uncertainty will tend to induce return predictability in ways that resemble irrational mispricing, prices can violate familiar volatility bounds even if discount rates are constant, and expected returns can deviate from the CAPM when investors attempt to hold mean-variance efficient portfolios. In short, estimation risk can be important for characterizing and testing market efficiency.

JEL Classification: C11, D83, G12, G14

Suggested Citation

Shanken, Jay A. and Lewellen, Jonathan W., Estimation Risk, Market Efficiency, and the Predictability of Returns (August 2000). Available at SSRN: https://ssrn.com/abstract=249314 or http://dx.doi.org/10.2139/ssrn.249314

Jay A. Shanken (Contact Author)

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States
404-727-4772 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jonathan W. Lewellen

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States
603-646-8650 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
1,369
Abstract Views
4,600
rank
13,929
PlumX Metrics