Have Risk Premia Vanished?
Abstract/Contents
- Abstract
- We apply a new methodology for identifying pervasive and discrete changes (“breaks”) in cross-sectional risk premia and find empirical evidence that these are economically important for understanding returns on US stocks. Size, value, and investment risk premia have fallen off to the point where they are insignificantly different from zero at the end of the sample. The market risk premium has also declined systematically over time but remains significant and positive as do the momentum and profitability risk premia. We construct a new instability risk factor from cross-sectional differences in individual stocks’ exposure to time-varying risk premia and show that this factor earns a premium comparable to that of commonly used risk factors. Using industry- and characteristics-sorted portfolios, we show that some breaks to the return premium process are broad-based, affecting all stocks regardless of industry- or firm characteristics, while others are limited to stocks with specific style characteristics. Moreover, we identify distinct lead-lag patterns in how breaks to the risk premium process impact stocks in different industries and with different style characteristics.
Description
| Type of resource | text |
|---|---|
| Date created | July 28, 2021 |
Creators/Contributors
| Author | Smith, Simon C. |
|---|---|
| Author | Timmermann, Allan |
| Organizer of meeting | Judd, Kenneth |
| Organizer of meeting | Pohl, Walter |
| Organizer of meeting | Schmedders, Karl |
| Organizer of meeting | Wilms, Ole |
Subjects
| Subject | cross-sectional variation in risk premia |
|---|---|
| Subject | instability risk factor |
| Subject | industry and style portfolios |
| Subject | Bayesian analysis |
| Genre | Text |
| Genre | Working paper |
| Genre | Grey literature |
Bibliographic information
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- User agrees that, where applicable, content will not be used to identify or to otherwise infringe the privacy or confidentiality rights of individuals. Content distributed via the Stanford Digital Repository may be subject to additional license and use restrictions applied by the depositor.
- License
- This work is licensed under a Creative Commons Attribution 4.0 International license (CC BY).
Preferred citation
- Preferred citation
- Smith, S. and Timmermann, A. (2022). Have Risk Premia Vanished?. Stanford Digital Repository. Available at https://purl.stanford.edu/bd517zj2900
Collection
SITE Conference 2021
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- siteworkshop@stanford.edu
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