Risk, Uncertainty, and Expected Returns
Turan G. Bali
Georgetown University - Robert Emmett McDonough School of Business
PBC School of Finance, Tsinghua University
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, and industry portfolios as well as individual stocks indicate that the conditional covariances of equity portfolios (individual stocks) 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 6 to 8 percent premium relative to portfolios that are minimally correlated with VRP.
Number of Pages in PDF File: 77
Keywords: Risk, Uncertainty, Expected Returns, ICAPM, Time-Series and Cross-Sectional Stock Returns, Variance Risk Premium, Conditional Asset Pricing Model.
JEL Classification: G10, G11, C13working papers series
Date posted: November 24, 2012 ; Last revised: January 11, 2013
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