Time-varying state variable risk premia in the ICAPM

Pedro Barroso, Paul Karehnke, Martijn Boons

Research output: Contribution to journalArticlepeer-review

7 Citations (Scopus)


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.
Original languageEnglish
Pages (from-to)428-451
Number of pages24
JournalJournal of Financial Economics
Issue number2
Publication statusPublished - Feb 2021
Externally publishedYes


  • Conditional asset pricing models
  • Consumption predictability
  • Intertemporal CAPM
  • State variables
  • Time-varying equity risk premia


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