Expected returns and risk in the stock market

M.J. Brennan and Alex P. Taylor

Journal of Empirical Finance, 2023, vol. 72, issue C, 276-300

Abstract: We explain time-varying expected returns by time-variation in the covariance of the market return with the pricing kernel. Simple specifications in which the kernel is spanned by a small number of factors reveal substantial levels of predictability with 1-year R2 of 17–18%. The pricing kernel identified by the model is essentially orthogonal to news about expected returns, suggesting that the predictability of market returns is due to the time-varying risk of cash-flow news.

Keywords: Predictability; Expected returns; Risk (search for similar items in EconPapers)
JEL-codes: G12 G14 G17 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:72:y:2023:i:c:p:276-300

DOI: 10.1016/j.jempfin.2023.03.002

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