Risk, Uncertainty, and Expected Returns

79 Pages Posted: 24 Nov 2012 Last revised: 29 Aug 2014

See all articles by Turan G. Bali

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Hao Zhou

SUSTech Business School; Tsinghua University - PBC School of Finance

Multiple version iconThere are 3 versions of this paper

Date Written: August 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 2014). AFA 2013 San Diego Meetings Paper, Available at SSRN: https://ssrn.com/abstract=2020604 or http://dx.doi.org/10.2139/ssrn.2020604

Turan G. Bali (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

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HOME PAGE: https://sites.google.com/a/georgetown.edu/turan-bali

Hao Zhou

SUSTech Business School ( email )

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Southern University of Science and Technology
Shenzhen, Guangdong
China
+86-0755-88010464 (Phone)

Tsinghua University - PBC School of Finance ( email )

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Beijing, 100083
China
+86-10-62790655 (Phone)

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