A New Test Of Risk Factor Relevance
55 Pages Posted: 13 Dec 2019 Last revised: 13 May 2021
Date Written: May 13, 2021
Textbook models assume that investors are trying to insure against bad states of the world associated with specific risk factors when investing. This is a testable assumption and we develop a survey framework for doing so. Our framework can be applied to any risk factor. We demonstrate the approach using consumption growth, making our results applicable to most modern asset-pricing models. Participants respond to changes in the mean and volatility of stock returns consistent with textbook models, but we find no evidence that they view an asset's correlation with consumption growth as relevant to investment decisions.
Keywords: Risk Factors, Expected Returns, Asset Pricing
JEL Classification: G12, G11, E21
Suggested Citation: Suggested Citation