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Learning, Asset-Pricing Tests, and Market Efficiency

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  • Jonathan Lewellen

    (MIT Sloan School of Management,)

  • Jay Shanken

    (Simon Graduate School of Business Administration at the University of Rochester, and NBER)

Abstract

This paper studies the asset-pricing implications of parameter uncertainty. We show that, when investors must learn about expected cash flows, empirical tests can find patterns in the data that differ from those perceived by rational investors. Returns might appear predictable to an econometrician, or appear to deviate from the Capital Asset Pricing Model, but investors can neither perceive nor exploit this predictability. Returns may also appear excessively volatile even though prices react efficiently to cash-flow news. We conclude that parameter uncertainty can be important for characterizing and testing market efficiency. Copyright The American Finance Association 2002.

Suggested Citation

  • Jonathan Lewellen & Jay Shanken, 2002. "Learning, Asset-Pricing Tests, and Market Efficiency," Journal of Finance, American Finance Association, vol. 57(3), pages 1113-1145, June.
  • Handle: RePEc:bla:jfinan:v:57:y:2002:i:3:p:1113-1145
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