The Impact of Risk and Uncertainty on Expected Returns

Posted: 21 Mar 2006 Last revised: 18 Sep 2012

See all articles by Evan W. Anderson

Evan W. Anderson

Northern Illinois University

Eric Ghysels

University of North Carolina Kenan-Flagler Business School; University of North Carolina (UNC) at Chapel Hill - Department of Economics

Jennifer L. Juergens

Cornerstone Research

Date Written: June 22, 2009

Abstract

We study asset pricing in economies featuring both risk and uncertainty. In our empirical analysis, we measure risk via return volatility and uncertainty via the degree of disagreement of professional forecasters, attributing different weights to each forecaster. We empirically model the typical risk-return trade-off and augment these models with our measure of uncertainty. We find stronger empirical evidence for an uncertainty-return trade-off than for the traditional risk-return trade-off. Finally, we investigate the performance of a two-factor model with risk and uncertainty in the cross section.

Keywords: Conditional volatility, model uncertainty, disagreement, factor models

JEL Classification: G10, G12, G17, D81

Suggested Citation

Anderson, Evan W. and Ghysels, Eric and Juergens, Jennifer L., The Impact of Risk and Uncertainty on Expected Returns (June 22, 2009). AFA 2007 Chicago Meetings Paper; EFA 2006 Zurich Meetings Paper; Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=890621

Evan W. Anderson (Contact Author)

Northern Illinois University ( email )

DeKalb, IL 60115
United States
815-753-5748 (Phone)

HOME PAGE: http://www.math.niu.edu/~anderson

Eric Ghysels

University of North Carolina Kenan-Flagler Business School ( email )

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

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Gardner Hall, CB 3305
Chapel Hill, NC 27599
United States
919-966-5325 (Phone)
919-966-4986 (Fax)

HOME PAGE: http://www.unc.edu/~eghysels/

Jennifer L. Juergens

Cornerstone Research

2001 K Street NW
North Tower, Suite 800
Washington, DC 20006
United States

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