Risk, Uncertainty, and Expected Returns

Posted: 30 Jul 2011 Last revised: 29 Aug 2014

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Hao Zhou

Tsinghua University - PBC School of Finance

Multiple version iconThere are 3 versions of this paper

Date Written: August 1, 2014

Abstract

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.

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

Suggested Citation

Bali, Turan G. and Zhou, Hao, Risk, Uncertainty, and Expected Returns (August 1, 2014). Sixth Singapore International Conference on Finance 2012 Paper. Available at SSRN: https://ssrn.com/abstract=1898878 or http://dx.doi.org/10.2139/ssrn.1898878

Turan G. Bali

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://msbonline.georgetown.edu/faculty-research/msf-faculty/turan-bali

Hao Zhou (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China
86-10-62790655 (Phone)

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