Time-varying state variable risk premia in the ICAPM

Pedro Barroso, Martijn Boons, Paul Karehnke

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Resumo

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.
Idioma originalEnglish
Número de páginas46
DOIs
Estado da publicaçãoPublicado - 15 mar. 2017
Publicado externamenteSim

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