State Variables, Macroeconomic Activity and the Cross-Section of Individual Stocks

64 Pages Posted: 10 Nov 2012 Last revised: 9 Jun 2015

Date Written: October 20, 2014

Abstract

I study whether risk premiums for exposure to state variables in the cross-section of individual stocks are consistent with how these variables forecast macroeconomic activity in the time-series. I find such time-series and cross-sectional consistency. This finding suggests that investors are ultimately concerned about business cycle risk and therefore require a premium for exposure to variables that contain systematic economic news. This finding challenges recent portfolio-level evidence showing that state variable risk premiums are inconsistent with hedging incentives in the ICAPM. Moreover, state variable risk premiums are not fully captured by the factors and characteristics of Fama and French (1992, 1993).

Keywords: State variables, Macroeconomic Risk, Linear Asset Pricing Models, Individual Stock Returns, Time-series and Cross-Sectional Consistency

JEL Classification: G11, G12, G13

Suggested Citation

Boons, Martijn, State Variables, Macroeconomic Activity and the Cross-Section of Individual Stocks (October 20, 2014). Available at SSRN: https://ssrn.com/abstract=2172770 or http://dx.doi.org/10.2139/ssrn.2172770

Martijn Boons (Contact Author)

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

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