Bruno Gerard (Norwegian School of Management–BI) Guojun Wu (University of Houston)
Abstract
We test a conditional asset pricing model that includes long-term interest rate risk as a priced factor for four asset classes—large stocks, small stocks, and long-term Treasury and corporate bonds. We find that the interest risk premium is the main component of the risk premiums for bond portfolios, while representing a small fraction of total risk premiums for equities. This suggests that stocks, especially small stocks, are hedges against variations in the investment opportunity set. We estimate that, at average market volatility levels, investors earn annual premiums between 3.6% during expansions and 5.8% during recessions for bearing intertemporal risk alone.
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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Business.
Volume (Year): 79 (2006) Issue (Month): 4 (July) Pages: 2203-2242 Download reference. The following formats are available: HTML
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