The Investor Recognition Hypothesis in a Dynamic General Equilibrium

Download or read book The Investor Recognition Hypothesis in a Dynamic General Equilibrium written by Alex Shapiro and published by . This book was released on 2001 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: This article analyzes a dynamic general equilibrium under ageneralization 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 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 augmented by the generalized investor recognition hypothesis emerges as a viable contender for explaining the cross-sectional variation in unconditional expected equity returns.