Necessary Evidence for a Risk Factor's Relevance

49 Pages Posted: 26 May 2020

See all articles by Alex Chinco

Alex Chinco

University of Illinois at Urbana-Champaign - College of Business

Samuel M. Hartzmark

University of Chicago - Booth School of Business

Abigail B. Sussman

University of Chicago - Booth School of Business

Date Written: May 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.

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Suggested Citation

Chinco, Alexander and Hartzmark, Samuel M. and Sussman, Abigail B., Necessary Evidence for a Risk Factor's Relevance (May 2020). NBER Working Paper No. w27227, Available at SSRN: https://ssrn.com/abstract=3609680

Alexander Chinco (Contact Author)

University of Illinois at Urbana-Champaign - College of Business ( email )

Champaign, IL 61820
United States

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

Samuel M. Hartzmark

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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