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Risk, Uncertainty, and Expected Returns

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Hao Zhou

Tsinghua University

August 2014

AFA 2013 San Diego Meetings 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.

Number of Pages in PDF File: 79

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

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Date posted: November 24, 2012 ; Last revised: August 29, 2014

Suggested Citation

Bali, Turan G. and Zhou, Hao, Risk, Uncertainty, and Expected Returns (August 2014). AFA 2013 San Diego Meetings Paper. Available at SSRN: http://ssrn.com/abstract=2020604 or http://dx.doi.org/10.2139/ssrn.2020604

Contact Information

Turan G. Bali (Contact Author)
Georgetown University - Robert Emmett McDonough School of Business ( email )
3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)
HOME PAGE: http://faculty.msb.edu/tgb27/index.html

Hao Zhou
Tsinghua University ( email )
43 Chengfu Road, Haidian District
Beijing, 100083
+86-10-62790655 (Phone)
HOME PAGE: http://www.pbcsf.tsinghua.edu.cn
Feedback to SSRN

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