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Can An ‘Estimation Factor’ Help Explain Cross‐Sectional Returns?
Author(s) -
Lundtofte Frederik
Publication year - 2009
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.2009.02131.x
Subject(s) - capital asset pricing model , econometrics , portfolio , estimation , economics , risk premium , excess return , factor analysis , covariance , asset (computer security) , market portfolio , risk factor , financial economics , mathematics , statistics , computer science , paleontology , context (archaeology) , management , computer security , biology , medicine
We show in a theoretical model that the expected excess return on any asset depends on its covariance not only with the market portfolio, but also with changes in the representative agent's estimate. We test our model using GMM and compare it to the CAPM. The results suggest that adding an ‘estimation factor’ to the CAPM helps explain cross‐sectional returns and that, unconditionally, this estimation factor carries a negative risk premium.