Time-varying state variable risk premia in the ICAPM

Pedro Barroso, Martijn Boons, Paul Karehnke

Research output: Working paperPreprint


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.
Original languageEnglish
Number of pages46
Publication statusPublished - 15 Mar 2017
Externally publishedYes


  • Conditional asset pricing models
  • State variables risks premiums
  • Intertemporal CAPM
  • Time-varying consumption predictability


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