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Risk, Uncertainty, and Expected Returns

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  • Turan G. Bali

    ()
    (McDonough School of Business, Georgetown University)

  • Hao Zhou

    ()
    (Division of Research and Statistics, Federal Reserve Board)

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Abstract

A conditional asset pricing model with risk and uncertainty implies that the time-varying exposures of equity portfolios to the market and uncertainty factors carry positive risk premiums. The empirical results from the size, book-to-market, and industry portfolios as well as individual stocks indicate that the conditional covariances of equity portfolios (individual stocks) with market and uncertainty predict the time-series and cross-sectional variation in stock returns. We find that equity portfolios that are highly correlated with economic uncertainty proxied by the variance risk premium (VRP) carry a significant, annualized 6 to 8 percent premium relative to portfolios that are minimally correlated with VRP.

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Bibliographic Info

Paper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 1306.

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Length: 78 pages
Date of creation: Feb 2013
Date of revision:
Handle: RePEc:koc:wpaper:1306

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Keywords: Risk; Uncertainty; Expected Returns; ICAPM; Time-Series and Cross-Sectional Stock Returns; Variance Risk Premium; Conditional Asset Pricing Model.;

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Cited by:
  1. Amélie Charles & Olivier Darné & Zakaria Moussa, 2014. "The sensitivity of Fama-French factors to economic uncertainty," Working Papers hal-01015702, HAL.

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