Understanding Risk and Return

J. OF POLITICAL ECONOMY, Vol. 104 No. 2, April 1996

Posted: 19 Jun 1998

See all articles by John Y. Campbell

John Y. Campbell

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

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Abstract

This paper uses an equilibrium multifactor model to interpret the cross-sectional pattern of postwar U.S. stock and bond returns. Priced factors include the return on a stock index, revisions in forecasts of future stock returns (to capture intertemporal hedging effects), and revisions in forecasts of future labor income growth (proxies for the return on human capital). Aggregate stock market risk is the main factor determining excess returns; but in the presence of human capital or stock market mean reversion, the coefficient of relative risk aversion is much higher than the price of stock market risk.

JEL Classification: G12

Suggested Citation

Campbell, John Y., Understanding Risk and Return. J. OF POLITICAL ECONOMY, Vol. 104 No. 2, April 1996, Available at SSRN: https://ssrn.com/abstract=7419

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