Term Structure of Risk in Expected Returns

Stock returns and volatility: Pricing the short-run and long-run components of market risk

Irina Zviadadze

The Review of Financial Studies, 2021, vol. 34, issue 12, 6032-6086

Abstract: This paper develops a methodology to test structural asset pricing models based on their implications for the multiperiod risk-return trade-off. A new measure, the term structure of risk, captures the sensitivities of multiperiod expected returns to structural shocks. The level and slope of the term structure of risk can indicate misspecification in equilibrium models. I evaluate the performance of asset pricing models with long-run risk, consumption disasters, and variance shocks. I find that only a model with multiple shocks in the variance of consumption growth is consistent with the propagation of and compensation for risk in the aggregate stock market.

JEL-codes: C32 C52 G12 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (3)

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Working Paper: Term Structure of Risk in Expected Returns (2018)
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