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- Title
Factor-Loading Uncertainty and Expected Returns.
- Authors
Armstrong, Christopher S.; Banerjee, Snehal; Corona, Carlos
- Abstract
Firm-specific information can affect expected returns if it affects investor uncertainty about risk-factor loadings. We show that a stock's expected return is decreasing in factor-loading uncertainty, controlling for the average level of its factor loading. When loadings are persistent, learning by investors can induce time-series variation in price-dividend ratios, expected returns, and idiosyncratic volatility, even when the aggregate risk-premium is constant and fundamental shocks are homoscedastic. Consistent with our predictions, we estimate that average annual returns of a firm with the median level of factor-loading uncertainty are 400 to 525 basis points lower than a comparable firm without factor-loading uncertainty.
- Subjects
UNCERTAINTY; EXPECTED returns; RATE of return on stocks; MARKET volatility; DIVIDENDS; ACCESS to information; HOMOSCEDASTICITY; FACTOR analysis; TIME series analysis; IDIOSYNCRATIC risk (Securities)
- Publication
Review of Financial Studies, 2013, Vol 26, Issue 1, p158
- ISSN
0893-9454
- Publication type
Article
- DOI
10.1093/rfs/hhs102