Volatility Risk Premium, Risk Aversion, and the Cross-Section of Stock Returns

22 Pages Posted: 13 Oct 2010

See all articles by Peter M. Nyberg

Peter M. Nyberg

Aalto University

Anders Vilhelmsson

Lund University - Department of Economics

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Abstract

We test if innovations in investor risk aversion are a priced factor in the stock market. Using 25 portfolios sorted on book-to-market and size as test assets, our new factor together with the market factor explains 64% of the variation in average returns compared to 60% for the Fama-French model. The new factor is generally significant with an estimated risk premium close to its time series mean also when industry portfolios and portfolios sorted on previous returns are augmented to the test assets.

Suggested Citation

Nyberg, Peter Mikael and Vilhelmsson, Anders, Volatility Risk Premium, Risk Aversion, and the Cross-Section of Stock Returns. Financial Review, Vol. 45, Issue 4, pp. 1079-1100, November 2010, Available at SSRN: https://ssrn.com/abstract=1691258 or http://dx.doi.org/10.1111/j.1540-6288.2010.00286.x

Peter Mikael Nyberg (Contact Author)

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101
Finland

Anders Vilhelmsson

Lund University - Department of Economics ( email )

Lund
Sweden

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