Title: | The Investor Recognition Hypothesis in a Dynamic General Equilibrium: Theory and |
Authors: | Shapiro, Alexander |
Issue Date: | Sep-1999 |
Series/Report no.: | FIN-99-031 |
Abstract: | This paper analyzes equilibrium in a dynamic pure-exchange economy under a generalization of Merton's (1987) investor recognition hypothesis (IRH). Because of information costs, a class of investors is assumed to possess incomplete information, which suffices to implement only a particular trading strategy. The IRH is mapped into corresponding portfolio restrictions that bind a subset of agents. The model is formulated in continuous time, and detailed characterization of equilibrium quantities is provided. 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. An empirical analysis suggests that a consumption-based capital asset pricing model (CCAPM) augmented by the IRH is a more realistic model than the traditional CCAPM for explaining the cross-sectional variation in unconditional expected equity returns. |
URI: | http://hdl.handle.net/2451/26960 |
Appears in Collections: | Finance Working Papers |
Files in This Item:
File | Description | Size | Format | |
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wpa99031.pdf | 902.05 kB | Adobe PDF | View/Open |
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