Conditional Risk in Global Stock Returns
75 Pages Posted: 16 Nov 2017 Last revised: 28 Jun 2021
Date Written: December 1, 2017
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: Suggested Citation