Dynamics of subjective risk premia

We examine subjective risk premia implied by return expectations of individual investors and professionals for portfolios of stocks, bonds, currencies, and commodity futures. While in-sample predictive regressions with realized excess returns suggest that objective risk premia vary countercyclically with business-cycle and asset-valuation measures, subjective risk premia extracted from survey data are largely acyclical. Out-of-sample forecasts of excess returns exhibit a similar lack of cyclicality, which suggests that investors’ learning of forecasting relationships in real time may help explain the cyclicality gap. There is a subjective risk-return tradeoff, with subjective risk premia increasing in subjective perceptions of risk quantity.