Risk, Uncertainty, and Expected Returns

Turan G. Bali () and Hao Zhou
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Turan G. Bali: McDonough School of Business, Georgetown University

Koç University-TUSIAD Economic Research Forum Working Papers from Koc University-TUSIAD Economic Research Forum

Abstract: A conditional asset pricing model with risk and uncertainty implies that the time-varying exposures of equity portfolios to the market and uncertainty factors carry positive risk premiums. The empirical results from the size, book-to-market, and industry portfolios as well as individual stocks indicate that the conditional covariances of equity portfolios (individual stocks) with market and uncertainty predict the time-series and cross-sectional variation in stock returns. We find that equity portfolios that are highly correlated with economic uncertainty proxied by the variance risk premium (VRP) carry a significant, annualized 6 to 8 percent premium relative to portfolios that are minimally correlated with VRP.

Keywords: Risk; Uncertainty; Expected Returns; ICAPM; Time-Series and Cross-Sectional Stock Returns; Variance Risk Premium; Conditional Asset Pricing Model. (search for similar items in EconPapers)
JEL-codes: C13 G10 G11 (search for similar items in EconPapers)
Pages: 78 pages
Date: 2013-02
New Economics Papers: this item is included in nep-fmk and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Risk, uncertainty, and expected returns (2011)
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