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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. Breitung, Jörg & Schmeling, Maik, 2011. "Quantifying survey expectations: What's wrong with the probability approach?," Hannover Economic Papers (HEP) dp-485, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    2. Bird, Ron & Yeung, Danny, 2012. "How do investors react under uncertainty?," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 20(2), pages 310-327.
    3. : Constantinos Antoniou & : Richard D.F. Harris & : Ruogu Zhang, 2013. "Ambiguity Aversion and Stock Market Participation: Evidence from Fund Flows," Working Papers, Warwick Business School, Finance Group wpn13-01, Warwick Business School, Finance Group.
    4. 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.
    5. Yehuda Izhakian & David Yermack, 2014. "Risk, Ambiguity, and the Exercise of Employee Stock Options," NBER Working Papers 19975, National Bureau of Economic Research, Inc.
    6. Menachem Brenner & Yehuda Izhakian, 2011. "Asset Priving and Ambiguity: Empirical Evidence," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 11-10, New York University, Leonard N. Stern School of Business, Department of Economics.
    7. Ron Bird & Daniel Choi & Danny Yeung, 2014. "Market uncertainty, market sentiment, and the post-earnings announcement drift," Review of Quantitative Finance and Accounting, Springer, vol. 43(1), pages 45-73, July.
    8. Kinnunen, Jyri, 2013. "Dynamic return predictability in the Russian stock market," Emerging Markets Review, Elsevier, vol. 15(C), pages 107-121.
    9. Amélie Charles & Olivier Darné & Zakaria Moussa, 2014. "The sensitivity of Fama-French factors to economic uncertainty," Working Papers hal-01015702, HAL.
    10. 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, Elsevier, vol. 20(2), pages 271-291.
    11. Menachem Brenner & Yehuda Izhakian & Orly Sade, 2011. "Ambiguity and Overconfidence," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 11-06, New York University, Leonard N. Stern School of Business, Department of Economics.
    12. Krahnen, Jan Pieter & Ockenfels, Peter & Wilde, Christian, 2014. "Measuring ambiguity aversion: A systematic experimental approach," SAFE Working Paper Series 55, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    13. Gryglewicz, Sebastian, 2011. "A theory of corporate financial decisions with liquidity and solvency concerns," Journal of Financial Economics, Elsevier, Elsevier, vol. 99(2), pages 365-384, February.
    14. Ulrich, Maxim, 2013. "Inflation ambiguity and the term structure of U.S. Government bonds," Journal of Monetary Economics, Elsevier, Elsevier, vol. 60(2), pages 295-309.

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