Conditional Risk in Global Stock Returns

75 Pages Posted: 16 Nov 2017 Last revised: 28 Jun 2021

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

Using a new and powerful conditional-risk factor, we document a global effect of time-varying market betas on stock returns. Across 23 developed countries, the major equity risk factors all load on the conditional-risk factor, which means their alpha can partly be explained by time-varying market betas. The conditional-risk factor explains 50% more alpha than traditional methods that use rolling betas to capture conditional risk. Studying the economic driver of the conditional risk, we find evidence that it 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 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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