Conditional risk

Niels Gormsen and Christian Skov Jensen

Journal of Financial Economics, 2024, vol. 162, issue C

Abstract: We study the extent to which time-variation in market betas influence estimates of CAPM alphas. Given the observed variation in conditional market betas, market risk premia, and market variance, the required compensation for conditional market risk can, in theory, be as large as the unconditional equity premium. We implement the conditional CAPM using state-of-the-art methods in a broad global sample. We find that accounting for conditional risk helps explain the return on all the major anomalies we consider and that conditional risk explains two percentage points of alpha for value, investment, and momentum strategies in recent years.

Keywords: Asset pricing; Conditional CAPM; Factor models; Time-varying discount rates (search for similar items in EconPapers)
JEL-codes: G10 G12 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:162:y:2024:i:c:s0304405x24001569

DOI: 10.1016/j.jfineco.2024.103933

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