BFS 2002 

Contributed Talk 
Tan Wang, Leonid Kogan
The focus of our paper is on the implications of model uncertainty for the crosssectional properties of returns. We perform our analysis in the context of a tractable singleperiod meanvariance framework. We show that there is an uncertainty premium in equilibrium expected returns on financial assets and study how the premium varies across the assets. In particular, the crosssectional distribution of expected returns can be formally described by a twofactor model, where expected returns are derived as compensation for the asset's contribution to the equilibrium risk and uncertainty of the market portfolio. In light of the large empirical literature on the crosssectional characteristics of asset returns, understanding the implications of model uncertainty even in such a simple setting would be of significant value. By characterizing the crosssection of returns we are also able to address some of the observational equivalence issues raised in the literature. That is, whether model uncertainty in financial markets can be distinguished from risk, and whether uncertainty aversion at an individual level can be distinguished from risk aversion.