The Investor Recognition Hypothesis in a Dynamic General Equilibrium: Theory and Evidence

The Investor Recognition Hypothesis in a Dynamic General Equilibrium: Theory and Evidence This article analyzes a dynamic general equilibrium under a generalization of Merton’s (1987) investor recognition hypothesis. A class of informationally constrained investors is assumed to implement only a particular trading strategy. The model implies that, all else being 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. A consumption-based capital asset pricing model (CAPM) augmented by the generalized investor recognition hypothesis emerges as a viable contender for explaining the cross-sectional variation in unconditional expected equity returns. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Financial Studies Oxford University Press

The Investor Recognition Hypothesis in a Dynamic General Equilibrium: Theory and Evidence

The Review of Financial Studies, Volume 15 (1) – Jan 16, 2002

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Publisher
Oxford University Press
Copyright
Copyright The Society for Financial Studies 2002
ISSN
0893-9454
eISSN
1465-7368
D.O.I.
10.1093/rfs/15.1.97
Publisher site
See Article on Publisher Site

Abstract

This article analyzes a dynamic general equilibrium under a generalization of Merton’s (1987) investor recognition hypothesis. A class of informationally constrained investors is assumed to implement only a particular trading strategy. The model implies that, all else being 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. A consumption-based capital asset pricing model (CAPM) augmented by the generalized investor recognition hypothesis emerges as a viable contender for explaining the cross-sectional variation in unconditional expected equity returns.

Journal

The Review of Financial StudiesOxford University Press

Published: Jan 16, 2002

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