"When risk-factor loadings are time-varying and unobservable, investors are forced to form beliefs about the levels of their loadings. The learning process involved in forming these beliefs has normative implications for asset-pricing tests. This paper develops an equilibrium model of learning...

We present an alternative expectation formation mechanism that helps rationalize well known asset pricing anomalies, such as the predictability of excess returns, excess volatility, and the equity-premium puzzle. As with rational expectations (RE), the expectation formation mechanism we consider...

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,...