An Intertemporal Risk Factor Model

112 Pages Posted: 1 Sep 2020 Last revised: 19 May 2021

See all articles by Fousseni Chabi-Yo

Fousseni Chabi-Yo

University of Massachusetts Amherst - Isenberg School of Management

Andrei Gonçalves

University of North Carolina (UNC) at Chapel Hill - Finance Area

Johnathan Loudis

University of Notre Dame - Mendoza College of Business

Date Written: May 19, 2021

Abstract

Previous factor models do not represent theoretically relevant risks. To address this issue, we implement a tradable ICAPM capturing market and intertemporal risk. We construct our intertemporal risk factors as long-short portfolios based on stock exposures to dividend yield and realized volatility, and show that they reflect mimicking portfolios for long-term expected returns and volatility. The estimated risk price signs are consistent with the ICAPM and their magnitudes imply moderate risk aversion. Our intertemporal factor model performs well relative to previous models in terms of its tangency Sharpe ratio, and its pricing of single stocks and portfolios prior literature recommends.

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

JEL Classification: G10, G11, G12

Suggested Citation

Chabi-Yo, Fousseni and Gonçalves, Andrei and Loudis, Johnathan, An Intertemporal Risk Factor Model (May 19, 2021). Kenan Institute of Private Enterprise Research Paper Forthcoming, 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 Gonçalves (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Johnathan Loudis

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

Notre Dame, IN 46556-5646
United States

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