Time-varying state variable risk premia in the ICAPM

• Autor(a) principal: Barroso, Pedro
• Data de Publicação: 2021
• Outros Autores: Boons, Martijn, Karehnke, Paul
• Tipo de documento: Artigo
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10362/107559
• topic: Conditional asset pricing models; Consumption predictability; Intertemporal CAPM; State variables; Time-varying equity risk premia; Accounting; Finance; Economics and Econometrics; Strategy and Management

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.