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Effects of uncertainty and risk aversion on the exposure of investment-style factor returns to real activity

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  • González-Sánchez, Mariano
  • Nave, Juan
  • Rubio, Gonzalo

Abstract

How do uncertainty and risk aversion affect the behavior of investment-style factors? We argue that a significant channel through which both uncertainty and risk aversion impact aggregate risk factors is the exposure of factor returns to real activity. We analyze this issue using mixed data sampling decomposition of the sensitivity of factor returns to real activity into high- and low-frequency components. We find a positive and significant relation between uncertainty and risk aversion for the low-frequency component of the sensitivity of factor returns to economic activity. More importantly, risk aversion significantly amplifies the effects of uncertainty on real activity exposure. The quality-based factor is an important exception to these findings.

Suggested Citation

  • González-Sánchez, Mariano & Nave, Juan & Rubio, Gonzalo, 2020. "Effects of uncertainty and risk aversion on the exposure of investment-style factor returns to real activity," Research in International Business and Finance, Elsevier, vol. 53(C).
    • Handle: RePEc:eee:riibaf:v:53:y:2020:i:c:s0275531919310876
    DOI: 10.1016/j.ribaf.2020.101236
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    More about this item

    Keywords

    Real activity beta; Low-frequency component; High-frequency component; Uncertainty; Risk aversion; Investment-style factors;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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