Necessary Evidence For A Risk Factor’s Relevance
48 Pages Posted: 13 Dec 2019 Last revised: 30 Apr 2020
Date Written: April 29, 2020
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: Suggested Citation