Tradable Aggregate Risk Factors and the Cross-Section of Stock Returns
41 Pages Posted: 29 Apr 2013 Last revised: 15 Dec 2016
Date Written: December 2016
Abstract
We propose a new set of tradable aggregate risk factors that help us understand the cross-section of stock returns. We argue that the true stochastic discount factor is a combination of aggregate return factors that drive equity market returns. Hence, we consider new factors using data such as market dividend swaps and market volatility futures. In the particular case of value and size portfolios, we find that differences in expected returns can be explained by a single-factor projection of the discount factor that loads only on a dividend growth return factor constructed with market dividend swap data. Hence, value and small capitalization stocks have higher expected returns due to their exposure to dividend growth returns implying that growth risks (dividend growth news and/or expected return news associated with dividend growth) are the only source of their risk premia. A tradable dividend level factor and a volatility-based factor are also priced in the cross-section of other stock portfolios sorted on dividend yield, earnings yield and cash-flow-to-price.
Keywords: Asset Pricing; Factor model; Value premium; Size premium
JEL Classification: G12
Suggested Citation: Suggested Citation
Register to save articles to
your library
Recommended Papers
-
By Andrew Ang
-
A Five-Factor Asset Pricing Model
By Eugene F. Fama and Kenneth R. French
-
…and the Cross-Section of Expected Returns
By Campbell R. Harvey, Yan Liu, ...
-
A Trend Factor: Any Economic Gains from Using Information over Investment Horizons?
By Yufeng Han, Guofu Zhou, ...
-
By Nick Baltas and Robert Kosowski
-
By Clifford S. Asness, Andrea Frazzini, ...
-
By Ralph S. J. Koijen, Tobias J. Moskowitz, ...
-
Risk Budgeting and Diversification Based on Optimized Uncorrelated Factors
By Attilio Meucci, Alberto Santangelo, ...
-
By Campbell R. Harvey and Yan Liu
-
Generalized Risk-Based Investing
By Emmanuel Jurczenko, Thierry Michel, ...