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