Is Learning a Dimension of Risk?
59 Pages Posted: 4 Mar 2002
Date Written: June 17, 2002
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: Suggested Citation