Conditional Risk in Global Stock Returns

73 Pages Posted: 16 Nov 2017 Last revised: 9 Jan 2020

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

Abstract

We estimate the premium associated with time-varying market betas without using rolling betas or instruments. Instead, we use a new conditional-risk factor, which is a market timing strategy defined as the unexpected return on the market times the ex ante price of risk. The factor is a powerful tool for documenting a global effect of conditional risk on stock returns: across 23 developed countries, all major equity risk factors load on our conditional-risk factor with the right sign, meaning their alpha can partly be explained by the time variation in their market betas. The conditional-risk factor explains 50% more alpha than traditional methods that use rolling betas to capture conditional risk.

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 in Global Stock Returns (December 1, 2017). Available at SSRN: https://ssrn.com/abstract=3070419 or http://dx.doi.org/10.2139/ssrn.3070419

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
Italy

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