A New Test Of Risk Factor Relevance

58 Pages Posted: 13 Dec 2019 Last revised: 11 Apr 2022

See all articles by Alex Chinco

Alex Chinco

City University of NY, Baruch College, Zicklin 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: July 22, 2021

Abstract

Textbook models assume that investors try 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, which makes 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

Chinco, Alexander and Hartzmark, Samuel M. and Sussman, Abigail B., A New Test Of Risk Factor Relevance (July 22, 2021). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3487624 or http://dx.doi.org/10.2139/ssrn.3487624

Alexander Chinco

City University of NY, Baruch College, Zicklin School of Business ( email )

One Bernard Baruch Way
New York, NY 10010
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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