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On Equilibrium Pricing under Parameter Uncertainty

Jeffrey L. Coles, Uri Loewenstein and Jose Suay
The Journal of Financial and Quantitative Analysis
Vol. 30, No. 3 (Sep., 1995), pp. 347-364
DOI: 10.2307/2331345
Stable URL: http://www.jstor.org/stable/2331345
Page Count: 18
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
On Equilibrium Pricing under Parameter Uncertainty
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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.

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