Risk and the cross section of stock returns

R. Burlacu (), P. Fontaine, S. Jimenez-Garces () and M. Seasholes
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R. Burlacu: CEREFIGE - Centre Européen de Recherche en Economie Financière et Gestion des Entreprises - UL - Université de Lorraine
P. Fontaine: CERAG - Centre d'études et de recherches appliquées à la gestion - UPMF - Université Pierre Mendès France - Grenoble 2 - CNRS - Centre National de la Recherche Scientifique
S. Jimenez-Garces: COACTIS - COnception de l'ACTIon en Situation - UL2 - Université Lumière - Lyon 2 - UJM - Université Jean Monnet - Saint-Étienne
M. Seasholes: HKUST - Hong Kong University of Science and Technology

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Abstract: This paper mathematically transforms unobservable rational expectation equilibrium model parameters (information precision and supply uncertainty) into a single variable that is correlated with expected returns and that can be estimated with recently observed data. Our variable can be used to explain the cross section of returns in theoretical, numerical, and empirical analyses. Using Center for Research in Security Prices data, we show that a -1 sigma to +1 sigma change in our variable is associated with a 0.31% difference in average returns the following month (equaling 3.78% per annum). The results are statistically significant at the 1% level. Our results remain economically and statistically significant after controlling for stocks' market capitalizations, book-to-market ratios, liquidities, and the probabilities of information-based trading.

Keywords: Risk; the cross section; stock returns (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (2)

Published in Journal of Financial Economics, 2012, 105 (3), pp.511-522. ⟨10.1016/j.jfineco.2012.03.008⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00755973

DOI: 10.1016/j.jfineco.2012.03.008

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