Can an 'estimation factor' help explain cross-sectional returns?

Frederik Lundtofte*

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

1 Citation (Scopus)


We show in a theoretical model that the expected excess return on any asset depends on its covariance not only with the market portfolio, but also with changes in the representative agent's estimate. We test our model using GMM and compare it to the CAPM. The results suggest that adding an 'estimation factor' to the CAPM helps explain cross-sectional returns and that, unconditionally, this estimation factor carries a negative risk premium.

Original languageEnglish
JournalJournal of Business Finance and Accounting
Issue number5-6
Pages (from-to)705-724
Number of pages20
Publication statusPublished - 1 Jun 2009
Externally publishedYes


  • Asset pricing models
  • Equilibrium
  • Incomplete information
  • Learning


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