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The risk–return tradeoff among equity factors

Pedro Barroso and Paulo Maio

Journal of Empirical Finance, 2024, vol. 78, issue C

Abstract: We examine the time-series risk–return tradeoff among equity factors. We obtain a positive tradeoff for profitability and investment factors, which is consistent with the APT. Such relationship subsists when we control by the covariance with the market factor, which represents consistency with Merton’s ICAPM. Critically, we obtain an insignificant risk–return relationship for the market and other factors. The tradeoff is weaker among international equity markets. The out-of-sample forecasting power tends to be economically significant for the investment and profitability factors. Our results suggest that the risk–return tradeoff is stronger within segments of the stock market than for the whole.

Keywords: Asset pricing; Risk–return tradeoff; ICAPM; Realized volatility; Profitability and investment factors (search for similar items in EconPapers)
JEL-codes: G11 G12 G17 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:78:y:2024:i:c:s0927539824000537

DOI: 10.1016/j.jempfin.2024.101518

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