How Important Is Intertemporal Risk for Asset Allocation?
AbstractWe 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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Bibliographic InfoArticle provided by University of Chicago Press in its journal Journal of Business.
Volume (Year): 79 (2006)
Issue (Month): 4 (July)
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Web page: http://www.journals.uchicago.edu/JB/
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- Maio, Paulo, 2013. "Return decomposition and the Intertemporal CAPM," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4958-4972.
- Maio, Paulo & Santa-Clara, Pedro, 2012. "Multifactor models and their consistency with the ICAPM," Journal of Financial Economics, Elsevier, vol. 106(3), pages 586-613.
- Mazzotta, Stefano, 2008. "How important is asymmetric covariance for the risk premium of international assets?," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1636-1647, August.
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