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The impact of risk and uncertainty on expected returns

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  • Anderson, Evan W.
  • Ghysels, Eric
  • Juergens, Jennifer L.
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    Abstract

    We study asset pricing in economies featuring both risk and uncertainty. In our empirical analysis, we measure risk via return volatility and uncertainty via the degree of disagreement of professional forecasters, attributing different weights to each forecaster. We empirically model the typical risk-return trade-off and augment these models with our measure of uncertainty. We find stronger empirical evidence for an uncertainty-return trade-off than for the traditional risk-return trade-off. Finally, we investigate the performance of a two-factor model with risk and uncertainty in the cross section.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 94 (2009)
    Issue (Month): 2 (November)
    Pages: 233-263

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    Handle: RePEc:eee:jfinec:v:94:y:2009:i:2:p:233-263

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Conditional volatility Model uncertainty Disagreement Factor models;

    References

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    Cited by:
    1. Sévi, Benoît, 2013. "An empirical analysis of the downside risk-return trade-off at daily frequency," Economic Modelling, Elsevier, vol. 31(C), pages 189-197.
    2. Ulrich, Maxim, 2013. "Inflation ambiguity and the term structure of U.S. Government bonds," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 295-309.
    3. Breitung, Jörg & Schmeling, Maik, 2011. "Quantifying survey expectations: What's wrong with the probability approach?," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Leibniz Universität Hannover dp-485, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    4. Kinnunen, Jyri, 2013. "Dynamic return predictability in the Russian stock market," Emerging Markets Review, Elsevier, vol. 15(C), pages 107-121.
    5. Gryglewicz, Sebastian, 2011. "A theory of corporate financial decisions with liquidity and solvency concerns," Journal of Financial Economics, Elsevier, vol. 99(2), pages 365-384, February.
    6. : Constantinos Antoniou & : Richard D.F. Harris & : Ruogu Zhang, 2013. "Ambiguity Aversion and Stock Market Participation: Evidence from Fund Flows," Working Papers wpn13-01, Warwick Business School, Finance Group.
    7. Menachem Brenner & Yehuda Izhakian & Orly Sade, 2011. "Ambiguity and Overconfidence," Working Papers 11-06, New York University, Leonard N. Stern School of Business, Department of Economics.
    8. Choe, Kwang-il & Choi, Pilsun & Nam, Kiseok & Vahid, Farshid, 2012. "Testing financial contagion on heteroskedastic asset returns in time-varying conditional correlation," Pacific-Basin Finance Journal, Elsevier, vol. 20(2), pages 271-291.
    9. Bird, Ron & Yeung, Danny, 2012. "How do investors react under uncertainty?," Pacific-Basin Finance Journal, Elsevier, vol. 20(2), pages 310-327.
    10. Menachem Brenner & Yehuda Izhakian, 2011. "Asset Priving and Ambiguity: Empirical Evidence," Working Papers 11-10, New York University, Leonard N. Stern School of Business, Department of Economics.

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