Is Learning a Dimension of Risk?

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