An Intertemporal Risk Factor Model

171 Pages Posted: 1 Sep 2020 Last revised: 2 May 2024

See all articles by Fousseni Chabi-Yo

Fousseni Chabi-Yo

University of Massachusetts Amherst - Isenberg School of Management

Andrei S. Gonçalves

Ohio State University (OSU) - Fisher College of Business

Johnathan Loudis

University of Notre Dame - Mendoza College of Business

Date Written: April 30, 2024

Abstract

Prominent factor models are based on tradable factors that do not represent theoretically relevant risks. To address this issue, we develop a factor model that captures the risks to long-term investors present in the Intertemporal CAPM (ICAPM). Empirically, we construct intertemporal risk factors as long-short portfolios based on stock exposures to dividend yield and realized variance. These tradable factors mimic news to long-term expected returns and volatility, and they offset part of the marginal utility increase in recessions induced by wealth declines. Our intertemporal factor model estimation implies significant risk prices that are consistent with the ICAPM restrictions under moderate risk aversion. Moreover, our model performs well relative to previous factor models in terms of its tangency Sharpe ratio and its pricing of key test assets, including single stocks, industry portfolios, and portfolios sorted on risk exposures and lagged anomalies.

Keywords: ICAPM, Intertemporal Risk, Long-term Investors, Factor Models

JEL Classification: G10, G11, G12

Suggested Citation

Chabi-Yo, Fousseni and S. Gonçalves, Andrei and Loudis, Johnathan, An Intertemporal Risk Factor Model (April 30, 2024). Available at SSRN: https://ssrn.com/abstract=3684533 or http://dx.doi.org/10.2139/ssrn.3684533

Fousseni Chabi-Yo

University of Massachusetts Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States

Andrei S. Gonçalves (Contact Author)

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Johnathan Loudis

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

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