Dynamics of Subjective Risk Premia

70 Pages Posted: 2 Mar 2022

See all articles by Stefan Nagel

Stefan Nagel

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research; CESifo (Center for Economic Studies and Ifo Institute)

Zhengyang Xu

City University of Hong Kong - Department of Economics & Finance

Multiple version iconThere are 4 versions of this paper

Date Written: February 28, 2022

Abstract

We examine subjective risk premia implied by return expectations of individual investors and professionals for aggregate portfolios of stocks, bonds, currencies, and commodity futures. While in-sample predictive regressions with realized excess returns suggest that objective risk premia vary countercyclically with business cycle variables and aggregate asset valuation measures, subjective risk premia extracted from survey data do not comove much with these variables. This lack of cyclicality of subjective risk premia is a pervasive property that holds in expectations of different groups of market participants and in different asset classes. A similar lack of cyclicality appears in out-of-sample forecasts of excess returns, which suggests that investors’ learning of forecasting relationships in real time may explain much of the cyclicality gap. These findings cast doubt on models that explain time-varying objective risk premia inferred from in-sample regressions with countercyclical variation in perceived risk or risk aversion. We further find a link between subjective perceptions of risk and subjective risk premia, which points toward a positive risk-return tradeoff in subjective beliefs.

JEL Classification: G12,G41

Suggested Citation

Nagel, Stefan and Xu, Zhengyang, Dynamics of Subjective Risk Premia (February 28, 2022). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2022-31, Available at SSRN: https://ssrn.com/abstract=4047221 or http://dx.doi.org/10.2139/ssrn.4047221

Stefan Nagel (Contact Author)

University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research ( email )

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CESifo (Center for Economic Studies and Ifo Institute) ( email )

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Germany

Zhengyang Xu

City University of Hong Kong - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

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