TY - UNPB
T1 - Time-varying state variable risk premia in the ICAPM
AU - Barroso, Pedro
AU - Boons, Martijn
AU - Karehnke, Paul
PY - 2017/3/15
Y1 - 2017/3/15
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 US 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 sign and is 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 US 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 sign and is 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 - State variables risks premiums
KW - Intertemporal CAPM
KW - Time-varying consumption predictability
U2 - 10.2139/ssrn.2933449
DO - 10.2139/ssrn.2933449
M3 - Preprint
BT - Time-varying state variable risk premia in the ICAPM
ER -