Risk, Uncertainty, and Expected Returns
Turan G. Bali
Georgetown University - Robert Emmett McDonough School of Business
Tsinghua University - PBC School of Finance
August 1, 2014
Sixth Singapore International Conference on Finance 2012 Paper
A conditional asset pricing model with risk and uncertainty implies that the time-varying exposures of equity portfolios to the market and uncertainty factors carry positive risk premiums. The empirical results from the size, book-to-market, momentum, and industry portfolios indicate that the conditional covariances of equity portfolios with market and uncertainty predict the time-series and cross-sectional variation in stock returns. We find that equity portfolios that are highly correlated with economic uncertainty proxied by the variance risk premium (VRP) carry a significant, annualized 8 percent premium relative to portfolios that are minimally correlated with VRP.
Keywords: Risk, Uncertainty, Expected Returns, ICAPM, Time-Series and Cross-Sectional Stock Returns, Variance Risk Premium, Conditional Asset Pricing Model
JEL Classification: G10, G11, C13
Date posted: July 30, 2011 ; Last revised: August 29, 2014
© 2015 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo6 in 0.266 seconds