A Cross-sectional Theory of Price of Risk (and Risk) Proxies

17 Pages Posted: 8 Apr 2019 Last revised: 8 May 2019

See all articles by Thiago de Oliveira Souza

Thiago de Oliveira Souza

University of Southern Denmark; Danish Finance Institute

Date Written: May 6, 2019

Abstract

This paper theoretically reconciliates the several types of value premiums observed in cross-section with the use of aggregate scaled-price ratios - including "value spreads" - as price of risk proxies in time series. Prices in scaled-price ratios reflect risk premiums (and the price of risk), while the scaling variables control for expected cash flows. They differ from risk proxies (without a price component) that only predict returns in cross-section. The ratios between each proxy's risk premium in cross section and the proxy's standard deviation in time series rank the proxies based on their theoretical correlations with the price of risk.

Keywords: Value premium, value spread, dividend-price, price of risk proxies, ranking.

JEL Classification: G11, G12, G14

Suggested Citation

de Oliveira Souza, Thiago, A Cross-sectional Theory of Price of Risk (and Risk) Proxies (May 6, 2019). Available at SSRN: https://ssrn.com/abstract=3363939 or http://dx.doi.org/10.2139/ssrn.3363939

Thiago De Oliveira Souza (Contact Author)

University of Southern Denmark ( email )

Campusvej 55
DK-5230 Odense, 5000
Denmark

Danish Finance Institute ( email )

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