Work

Term Structure of Risk in Expected Returns

Year: 2021

Type: article

Abstract: This paper develops a methodology to test structural asset pricing models based on their implications for the multiperiod risk-return trade-off. A new measure, the term structure of risk, captures the sensitivities of multiperiod expected returns to structural shocks. The level and slope of the term structure of risk can indicate misspecification in equilibrium models. I evaluate the performance of asset pricing models with long-run risk, consumption disasters, and variance shocks. I find that only a model with multiple shocks in the variance of consumption growth is consistent with the propagation of and compensation for risk in the aggregate stock market.

Source: Review of Financial Studies

DOI: 10.1093/rfs/hhab013

Author: Irina Zviadadze

Institution: HEC Paris

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

Funder: Agence Nationale de la Recherche

Awards: Idex Paris-Saclay, Réguler l'économie au service de la société