Conditional Risk

67 Pages Posted: 16 Nov 2017 Last revised: 21 Dec 2018

See all articles by Niels Joachim Gormsen

Niels Joachim Gormsen

University of Chicago - Booth School of Business

Christian Skov Jensen

Bocconi University

Date Written: December 1, 2017


We show theoretically that the required compensation for time-varying betas in the CAPM can be estimated by a precisely defined conditional-risk factor, which can be used in factor regressions. Both in the U.S. and global sample covering 23 countries, all major equity risk factors load on our conditional-risk factor, meaning that their market betas vary over time and that this variation explains part of their average returns. Studying the economic drivers of these results, we find evidence that this conditional risk arises from variation in discount rate betas (not cash flow betas) due to the endogenous effects of arbitrage trading.

Keywords: Asset Pricing, Conditional CAPM, Factor Models, Time-Varying Discount Rates

JEL Classification: G10, G12

Suggested Citation

Gormsen, Niels Joachim and Jensen, Christian Skov, Conditional Risk (December 1, 2017). Available at SSRN: or

Niels Joachim Gormsen (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Christian Skov Jensen

Bocconi University ( email )

Via Roentgen 1
Milano, MI 20136

Register to save articles to
your library


Paper statistics

Abstract Views
PlumX Metrics