The Investor Recognition Hypothesis in a Dynamic General Equilibrium: Theory and Evidence

Posted: 17 May 2001

See all articles by Alex Shapiro

Alex Shapiro

New York University (NYU) - Department of Finance

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Abstract

This article analyzes a dynamic general equilibrium under a generalization of Merton's (1987) investor recognition hypothesis. A class of informationally constrained investors is assumed to implement only a particular trading strategy. The model implies that, all else equal, a risk premium on a less visible stock need not be higher than that on a more visible stock with a lower volatility - contrary to results derived in a static mean-variance setting. A consumption-based capital asset pricing model augmented by the generalized investor recognition hypothesis emerges as a viable contender for explaining the cross-sectional variation in unconditional expected equity returns.

Keywords: Investor recognition, asset pricing, portfolio constraints, risk premia, consumption, cross section of returns

JEL Classification: G12, G23, D51, D52

Suggested Citation

Shapiro, Alex, The Investor Recognition Hypothesis in a Dynamic General Equilibrium: Theory and Evidence. Review of Financial Studies, Vol. 15, No. 1, pp. 97-141, Spring 2002. Available at SSRN: https://ssrn.com/abstract=264884

Alex Shapiro (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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New York, NY 10012-1126
United States
212-998-0362 (Phone)
212-995-4233 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~ashapiro/

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