Unawareness Premia

Scott Condie (), Lars Stentoft and Marie-Louise Vierø ()
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Scott Condie: Department of Economics, Brigham Young University
Marie-Louise Vierø: Department of Economics and Business Economics, Aarhus University, Postal: Fuglesangs Alle 4, DK-8210 Aarhus V, Denmark
Authors registered in the RePEc Author Service: Marie-Louise Vierø

Economics Working Papers from Department of Economics and Business Economics, Aarhus University

Abstract: This paper considers the effect on asset prices of investors contemplating the possible occurrence of unexpected and unprecedented events that they have no basis to evaluate. We build a Capital Asset Pricing Model (CAPM) where, in addition to regular risk, investors are aware that they are potentially unaware of some events. We show that when investors feel that there exist states about which they are unaware, asset prices contain an unawareness premium. A driving force is that the “risk free†asset is no longer considered to be truly risk free. We develop a methodology that enables us to estimate the systematic portion of the unawareness premium, and we estimate it using data from 1980 to 2022. We find evidence in support of the hypothesis that unawareness, in addition to risk, is a determinant of expected equity returns.

Keywords: CAPM; Equity Premium; Unawareness (search for similar items in EconPapers)
JEL-codes: D83 G12 G41 (search for similar items in EconPapers)
Pages: 35
Date: 2023-09-29
New Economics Papers: this item is included in nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:aah:aarhec:2023-09

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