The value premium, aggregate risk innovations, and average stock returns

Knut F. Lindaas and Prodosh Simlai

Finance Research Letters, 2014, vol. 11, issue 3, 303-317

Abstract: We test whether innovations in aggregate risk, interpolated from a vector autoregressive system that contains the Chen et al. (1986) five factors as in Petkova (2006), are common factors in cross-sectional stock returns. We provide direct evidence that innovation in industrial production growth, a classical business-cycle variable that summarizes the state of the economy, is associated with the cross-sectional return predictability of individual stocks. We conclude that the role of innovation in aggregate risk is not random, and furthermore that it provides guidance concerning an important source of nonfinancial market-based risk in asset returns.

Keywords: Firm size; Book-to-market; Risk innovations; Industrial production growth; Investment opportunity (search for similar items in EconPapers)
JEL-codes: E21 G11 G12 G14 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:11:y:2014:i:3:p:303-317

DOI: 10.1016/j.frl.2014.06.001

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