Conditional Risk in Global Stock Returns
73 Pages Posted: 16 Nov 2017 Last revised: 9 Jan 2020
Date Written: December 1, 2017
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: Suggested Citation