Have risk premia vanished?

Simon C. Smith and Allan Timmermann

Journal of Financial Economics, 2022, vol. 145, issue 2, 553-576

Abstract: We apply a new methodology for identifying pervasive and discrete changes (“breaks”) in cross-sectional risk premia. 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 period. The market risk premium has also declined systematically over time but remains significant and positive as do the momentum and profitability risk premium. 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.

Keywords: Cross-sectional variation in risk premia; Instability risk factor; Industry and style portfolios; Bayesian analysis (search for similar items in EconPapers)
JEL-codes: C11 C15 G11 G12 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:145:y:2022:i:2:p:553-576

DOI: 10.1016/j.jfineco.2021.08.019

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