TY - JOUR
T1 - Time-varying state variable risk premia in the ICAPM
AU - Barroso, Pedro
AU - Karehnke, Paul
AU - Boons, Martijn
N1 - Funding Information:
We are grateful to Jonathan Lewellen (the referee), Daniel Buncic, Julien Cujean, Andras Fulop, Gleb Gertsman, Andrei Gonçalves, 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:
© 2020 Elsevier B.V.
PY - 2021/2
Y1 - 2021/2
N2 - 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.
AB - 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.
KW - Conditional asset pricing models
KW - Consumption predictability
KW - Intertemporal CAPM
KW - State variables
KW - Time-varying equity risk premia
UR - http://www.scopus.com/inward/record.url?scp=85089248040&partnerID=8YFLogxK
U2 - 10.1016/j.jfineco.2020.07.016
DO - 10.1016/j.jfineco.2020.07.016
M3 - Article
SN - 0304-405X
VL - 139
SP - 428
EP - 451
JO - Journal of Financial Economics
JF - Journal of Financial Economics
IS - 2
ER -