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Volatility Risk Premium, Risk Aversion and the Cross-Section of Stock Returns

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Author

Summary, in English

We test if innovations in investor risk aversion are a priced factor in the stock market. Time series tests show that the new factor partly explains the strong momentum effect in stock returns. Furthermore, using 25 portfolios sorted on book-to-market and size as test assets, our new factor together with the market factor explains 64% of the variation in

average returns compared to 60% for the Fama-French model. The new factor is generally significant with an estimated risk premium close to its time series mean also when industry portfolios and portfolios sorted on previous returns are augmented to the test assets.

Publishing year

2010

Language

English

Pages

1079-1100

Publication/Series

Financial Review

Document type

Journal article

Publisher

Wiley-Blackwell

Topic

  • Business Administration
  • Economics

Keywords

  • volatility risk premium
  • Asset pricing
  • risk aversion
  • momentum
  • habit formation

Status

Published

ISBN/ISSN/Other

  • ISSN: 0732-8516