TY  - JOUR
AU  - Lewellen,Jonathan
AU  - Shanken,Jay
TI  - Estimation Risk, Market Efficiency, and the Predictability of Returns
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7699
PY  - 2000
Y2  - May 2000
UR  - http://www.nber.org/papers/w7699
L1  - http://www.nber.org/papers/w7699.pdf
N1  - Author contact info:
Jonathan Lewellen
Tuck School of Business at Dartmouth
305 Tuck Hall
Hanover, NH 03755
Tel: 603/646-8650
E-Mail: jon.lewellen@dartmouth.edu

Jay A. Shanken
Goizueta Business School
Emory University
1300 Clifton Road
Atlanta, GA 30322
Tel: 404/727-4772
Fax: 404/727-5238
E-Mail: jay.shanken@emory.edu
AB  - In asset pricing, estimation risk refers to investor uncertainty about the parameters of the return or cashflow process. We show that with estimation risk the observable properties of prices and returns can differ significantly from the properties perceived by rational investors. In particular, parameter uncertainty will tend to induce return predictability in ways that resemble irrational mispricing, and prices can violate familiar volatility bounds when investors are rational. Cross-sectionally, expected returns deviate from the CAPM even if investors attempt to hold mean-variance efficient portfolios, and these deviations can be predictable based on past dividends and prices. In short, estimation risk can be important for characterizing and testing market efficiency.
ER  -