Asset Pricing Models and Economic Risk Premia: A Decomposition

53 Pages Posted: 14 Feb 2008

See all articles by Pierluigi Balduzzi

Pierluigi Balduzzi

Boston College - Carroll School of Management

Cesare Robotti

Warwick Business School

Multiple version iconThere are 4 versions of this paper

Date Written: February 13, 2008

Abstract

The risk premia of linear factor models on economic (non-traded) risk factors can be decomposed into: i) the premium on maximum-correlation portfolios mimicking the factors; ii) (minus) the covariance between the non-traded components of the pricing kernel and the factors; and iii) (minus) the mispricing of the maximum-correlation portfolios. The first component is independent of a model's non-traded variability and mispricing, and is typically estimated with little bias and high precision. We conclude that the premia on maximum-correlation portfolios are appealing alternatives to the risk premia of linear factor models, with the dividend yield being the only economic factor significantly priced.

Keywords: economic factors, risk premia, pricing kernel, maximum-correlation portfolio

JEL Classification: G12

Suggested Citation

Balduzzi, Pierluigi and Robotti, Cesare, Asset Pricing Models and Economic Risk Premia: A Decomposition (February 13, 2008). Available at SSRN: https://ssrn.com/abstract=1092964 or http://dx.doi.org/10.2139/ssrn.1092964

Pierluigi Balduzzi (Contact Author)

Boston College - Carroll School of Management ( email )

Department of Finance
140 Commonwealth Avenue - Fulton Hall 438
Chestnut Hill, MA 02467
United States
617-552-3976 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://www.bc.edu/bc_org/avp/csom/faculty/

Cesare Robotti

Warwick Business School ( email )

West Midlands, CV4 7AL
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
171
Abstract Views
1,015
rank
66,808
PlumX Metrics