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On Equilibrium Pricing under Parameter Uncertainty

Published online by Cambridge University Press:  06 April 2009

Jeffrey L. Coles ,
Uri Loewenstein  and
Jose Suay
Jeffrey L. Coles
Affiliation:
College of Business, Arizona State University, Tempe, AZ 85287
Uri Loewenstein
Affiliation:
David Eccles School of Business, University of Utah, Salt Lake City, UT 84112
Jose Suay
Affiliation:
College of Business and Public Administration, Department of Finance, University of Arizona, Tucson, AZ 85721
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Abstract

Prior theoretical work on estimation risk generally has been restricted to single-period, returns-based models in which the investor must estimate the vector of expected returns but the covariance matrix is known. This paper extends the literature on parameter uncertainty in several ways. First, we analyze asymmetric parameter uncertainty in a model based on payoffs. Second, we explore the effects of both symmetric and asymmetric estimation risk on equilibrium asset prices when the covariance matrix for payoffs must also be estimated. Finally, we investigate the effects on equilibrium of asymmetric parameter uncertainty in a simple multiperiod model.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 30 , Issue 3 , September 1995 , pp. 347 - 364
Copyright
Copyright © School of Business Administration, University of Washington 1995

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