Is Learning a Dimension of Risk?

59 Pages Posted: 4 Mar 2002

See all articles by Massimo Massa

Massimo Massa

INSEAD - Finance

Andrei Simonov

Michigan State University - Eli Broad Graduate School of Management; Russian Presidential Academy of National Economy and Public Administration (RANEPA); Centre for Economic Policy Research (CEPR)

Date Written: June 17, 2002

Abstract

This paper is an empirical investigation of how the uncertainty induced by investors' learning about the fundamentals affects stock prices. We identify two components of induced uncertainty: learning and dispersion of beliefs. We characterize these in terms of their relationship to uncertainty about the fundamentals as estimated by surveys of economic forecasters and macro-economic indicators, and with measures of uncertainty embedded in derivative markets (open interest and implied volatility). We show that learning uncertainty is a risk factor and it is priced. Furthermore, we show that, in a conditional pricing model, investor learning and dispersion of beliefs affect the time-variation of the economic risk premium.

Keywords: conditional asset pricing, time-varying risk factors, learning uncertainty, filtering, trading volume

JEL Classification: G11, G12, G14

Suggested Citation

Massa, Massimo and Simonov, Andrei, Is Learning a Dimension of Risk? (June 17, 2002). EFA 2002 Berlin Meetings Presented Paper. Available at SSRN: https://ssrn.com/abstract=302309 or http://dx.doi.org/10.2139/ssrn.302309

Massimo Massa

INSEAD - Finance ( email )

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Andrei Simonov (Contact Author)

Michigan State University - Eli Broad Graduate School of Management ( email )

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United States

HOME PAGE: http://www.andreisimonov.com

Russian Presidential Academy of National Economy and Public Administration (RANEPA) ( email )

Vernadskogo Prospect 82
Moscow, 119571
Russia

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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