Fundamental Sources of the Time Variation in Equity Risk Levels

60 Pages Posted: 27 Apr 2020 Last revised: 4 May 2020

See all articles by Petra Sinagl

Petra Sinagl

University of Iowa - Department of Finance

Date Written: March 18, 2020

Abstract

What drives the time variation in equity risk? I find that industries with high fundamental
cash-flow risk have a higher degree of time variation in excess returns, systematic risk premia
and risk-adjusted returns. I propose an asset-pricing model with agents exposed to preference
shocks that can explain key asset-pricing patterns related to business cycle. My work suggests
that, unlike a habit-formation model, a consumption-based model with preference shocks is
useful in determining how cash-flow risk drives the crossectional variation in the empirical
distribution of risk and returns observed across US industries.

Keywords: cash-flow risk, time-varying equity risk, preference shocks, consumption-based asset pricing

JEL Classification: G12

Suggested Citation

Sinagl, Petra, Fundamental Sources of the Time Variation in Equity Risk Levels (March 18, 2020). Available at SSRN: https://ssrn.com/abstract=3556534 or http://dx.doi.org/10.2139/ssrn.3556534

Petra Sinagl (Contact Author)

University of Iowa - Department of Finance ( email )

Iowa City, IA 52242-1000
United States

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