Necessary Evidence For A Risk Factor’s Relevance

48 Pages Posted: 13 Dec 2019 Last revised: 30 Apr 2020

See all articles by Alex Chinco

Alex Chinco

University of Chicago - Booth School of Business

Samuel M. Hartzmark

University of Chicago - Booth School of Business

Abigail B. Sussman

University of Chicago - Booth School of Business

Date Written: April 29, 2020

Abstract

Textbook finance theory assumes that investors strategically try to insure themselves against bad future states of the world when forming portfolios. This is a testable assumption, surveys are ideally suited to test it, and we develop a framework for doing so. Our framework combines survey experiments with field data to test this assumption as it pertains to any candidate risk factor. We study consumption growth to demonstrate the approach. While participants strategically respond to changes in the mean and volatility of stock returns when forming their portfolios, there is no evidence that investors view this canonical risk factor as relevant.

Keywords: Risk Factors, Expected Returns, Correlation Neglect, Asset Pricing

JEL Classification: G12, G11, E21

Suggested Citation

Chinco, Alexander and Hartzmark, Samuel M. and Sussman, Abigail B., Necessary Evidence For A Risk Factor’s Relevance (April 29, 2020). Available at SSRN: https://ssrn.com/abstract=3487624 or http://dx.doi.org/10.2139/ssrn.3487624

Alexander Chinco

University of Chicago - Booth School of Business ( email )

5807 S Woodlawn Ave
Chicago, IL 60637
United States

HOME PAGE: http://www.alexchinco.com

Samuel M. Hartzmark (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Abigail B. Sussman

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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