Risk Price Variation: The Missing Half of Empirical Asset Pricing

Andrew Patton and Brian M Weller

The Review of Financial Studies, 2022, vol. 35, issue 11, 5127-5184

Abstract: Equal compensation across assets for the same risk exposures is a bedrock of asset pricing theory and empirics. Yet real-world frictions can violate this equality and create apparently high Sharpe ratio opportunities. We develop new methods for asset pricing with cross-sectional heterogeneity in compensation for risk. We extend k-means clustering to group assets by risk prices and introduce a formal test for whether differences in risk premiums across market segments are too large to occur by chance. We find significant evidence of cross-sectional variation in risk prices for almost all combinations of test assets, factor models, and time periods considered.

JEL-codes: C21 C55 G12 G14 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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