Asset Pricing with Estimation-Risk and Uncertain Information Quality

40 Pages Posted: 29 Apr 2005

See all articles by Rodney D Boehme

Rodney D Boehme

Wichita State University - Department of Finance, Real Estate & Decision Sciences (FREDS)

Praveen Kumar

University of Houston - Department of Finance

Bartley R. Danielsen

North Carolina State University - Poole College of Management

Sorin M. Sorescu

Texas A&M University - Department of Finance

Date Written: Januray 17, 2006

Abstract

We derive a conditional CAPM in a general equilibrium model where investors face estimation-risk on mean returns, and learn from information of uncertain quality or precision. In equilibrium, the loading on market risk augments the standard beta with the random or information-dependent conditional covariance matrix of the unknown mean returns. Therefore, announcement effects on equilibrium asset prices can occur because of changes in the required rate of return due to event-induced variations in estimation-risk, rather than revisions in estimated cash flows. In support of this prediction, we find that firms initiating cash payouts through repurchases during 1988-2000 show significant reduction in the post-event betas and their standard errors. The model is consistent with post-earnings-announcement drifts, and generates refutable predictions on the deviation of cross-sectional expected returns from the unconditional CAPM. Quantitatively, numerical simulations with an appropriately calibrated version of the model indicate that information quality risk has a substantial effect on equilibrium asset prices.

Keywords: Estimation-risk; Information quality; Conditional CAPM

JEL Classification: D83, D92, E22

Suggested Citation

Boehme, Rodney D and Kumar, Praveen and Danielsen, Bartley R. and Sorescu, Sorin M., Asset Pricing with Estimation-Risk and Uncertain Information Quality (Januray 17, 2006). Available at SSRN: https://ssrn.com/abstract=711961 or http://dx.doi.org/10.2139/ssrn.711961

Rodney D Boehme

Wichita State University - Department of Finance, Real Estate & Decision Sciences (FREDS) ( email )

Wichita, KS 67260-0078
United States

Praveen Kumar (Contact Author)

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States
713-743-4770 (Phone)
713-743-4789 (Fax)

Bartley R. Danielsen

North Carolina State University - Poole College of Management ( email )

Hillsborough Street
Raleigh, NC 27695-8614
United States
919-513-3003 (Phone)

Sorin M. Sorescu

Texas A&M University - Department of Finance ( email )

430 Wehner
College Station, TX 77843-4218
United States
979-458-0380 (Phone)

HOME PAGE: http://wehner.tamu.edu/finc.www/ssorescu/

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
267
Abstract Views
1,577
rank
119,977
PlumX Metrics