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

Alexander Shapiro

The Review of Financial Studies, 2002, vol. 15, issue 1, 97-141

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. Copyright 2002, Oxford University Press.

Date: 2002
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