An Intertemporal Risk Factor Model

159 Pages Posted: 1 Sep 2020 Last revised: 23 Jan 2023

See all articles by Fousseni Chabi-Yo

Fousseni Chabi-Yo

University of Massachusetts Amherst - Isenberg School of Management

Andrei S. Gonçalves

Ohio State University (OSU) - Fisher College of Business

Johnathan Loudis

University of Notre Dame - Mendoza College of Business

Date Written: January 23, 2023

Abstract

Factor models commonly used in asset pricing are based on tradable factors that do not represent theoretically relevant risks. To address this issue, we develop a factor model that is tightly linked to intertemporal asset pricing theory. Specifically, we show that a long-term Bayesian investor prices shocks to the market dividend yield and realized variance as they reflect news to long-term expected returns and volatility. Accordingly, we construct intertemporal risk factors as long-short portfolios based on stock exposures to dividend yield and realized variance. We then estimate their risk prices and find that they are consistent with the Intertemporal CAPM under moderate risk aversion. We also show that our intertemporal factor model performs well relative to previous factor models in terms of its tangency Sharpe ratio and its pricing of key test assets, including single stocks and industry portfolios.

Keywords: ICAPM, Intertemporal Risk, Long-term Investors, Factor Models

JEL Classification: G10, G11, G12

Suggested Citation

Chabi-Yo, Fousseni and S. Gonçalves, Andrei and Loudis, Johnathan, An Intertemporal Risk Factor Model (January 23, 2023). Available at SSRN: https://ssrn.com/abstract=3684533 or http://dx.doi.org/10.2139/ssrn.3684533

Fousseni Chabi-Yo

University of Massachusetts Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States

Andrei S. Gonçalves (Contact Author)

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Johnathan Loudis

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

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