@article{085caefc6cd44eee870589de5c0d6053,
title = "Time-varying state variable risk premia in the ICAPM",
abstract = "We find that the relation between state variables, such as the t-bill rate and term spread, and consumption growth is time-varying. In the cross-section of U.S. stocks, risk premia for exposure to state variables vary over time accordingly. When a state variable predicts consumption strongly relative to its own history, its annualized risk premium increases by 6% (0.4 in Sharpe ratio). This effect implies that risk premia can switch signs and are increasing in the conditional variance of the state variable. These common drivers of time-varying risk premia are consistent with the Intertemporal CAPM. Benchmark factors contain the same conditional expected return effects as state variable risk premia.",
keywords = "Conditional asset pricing models, Consumption predictability, Intertemporal CAPM, State variables, Time-varying equity risk premia",
author = "Pedro Barroso and Paul Karehnke and Martijn Boons",
note = "Funding Information: We are grateful to Jonathan Lewellen (the referee), Daniel Buncic, Julien Cujean, Andras Fulop, Gleb Gertsman, Andrei Gon{\c c}alves, Bill Schwert (the editor), and seminar participants at the Australasian Finance & Banking Conference, Empirical Finance Workshop in ESSEC, ESSEC Paris, Eurofidai Paris December Finance Meeting, European Economic Association Annual Congress in Lisbon, European Finance Association conference in Lisbon, Nova SBE in Lisbon, and UNSW in Sydney for helpful comments. This work was funded by National Funds through FCT Portugal. Funding Information: ? We are grateful to Jonathan Lewellen (the referee), Daniel Buncic, Julien Cujean, Andras Fulop, Gleb Gertsman, Andrei Gon?alves, Bill Schwert (the editor), and seminar participants at the Australasian Finance & Banking Conference, Empirical Finance Workshop in ESSEC, ESSEC Paris, Eurofidai Paris December Finance Meeting, European Economic Association Annual Congress in Lisbon, European Finance Association conference in Lisbon, Nova SBE in Lisbon, and UNSW in Sydney for helpful comments. This work was funded by National Funds through FCT Portugal. Publisher Copyright: {\textcopyright} 2020 Elsevier B.V.",
year = "2021",
month = feb,
doi = "10.1016/j.jfineco.2020.07.016",
language = "English",
volume = "139",
pages = "428--451",
journal = "Journal of Financial Economics",
issn = "0304-405X",
publisher = "Elsevier B.V.",
number = "2",
}