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State variables, macroeconomic activity, and the cross section of individual stocks

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  • Boons, Martijn

Abstract

I study whether risk premiums for exposure to state variables in the cross-section of individual stocks are consistent with how these variables forecast macroeconomic activity in the time series. I find such time series and cross-sectional consistency. This finding suggests that investors are ultimately concerned about business cycle risk and therefore require a premium for exposure to variables that contain systematic economic news. This finding challenges recent portfolio-level evidence showing that state variable risk premiums are inconsistent with hedging incentives in the Intertemporal CAPM. Moreover, state variable risk premiums are not fully captured by the factors and characteristics of Fama and French (1992, 1993).

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  • Boons, Martijn, 2016. "State variables, macroeconomic activity, and the cross section of individual stocks," Journal of Financial Economics, Elsevier, vol. 119(3), pages 489-511.
  • Handle: RePEc:eee:jfinec:v:119:y:2016:i:3:p:489-511
    DOI: 10.1016/j.jfineco.2015.05.010
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    Cited by:

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    2. Boons, Martijn & Duarte, Fernando & de Roon, Frans & Szymanowska, Marta, 2020. "Time-varying inflation risk and stock returns," Journal of Financial Economics, Elsevier, vol. 136(2), pages 444-470.
    3. Xyngis, Georgios, 2017. "Business-cycle variation in macroeconomic uncertainty and the cross-section of expected returns: Evidence for scale-dependent risks," Journal of Empirical Finance, Elsevier, vol. 44(C), pages 43-65.
    4. Schlag, Christian & Semenischev, Michael & Thimme, Julian, 2020. "Predictability and the cross-section of expected returns: A challenge for asset pricing models," SAFE Working Paper Series 289, Leibniz Institute for Financial Research SAFE.
    5. Gabor Pinter, 2016. "The Macroeconomic Shock with the Highest Price of Risk," Discussion Papers 1623, Centre for Macroeconomics (CFM), revised Apr 2017.
    6. Borup, Daniel, 2019. "Asset pricing model uncertainty," Journal of Empirical Finance, Elsevier, vol. 54(C), pages 166-189.
    7. Maio, Paulo & Philip, Dennis, 2018. "Economic activity and momentum profits: Further evidence," Journal of Banking & Finance, Elsevier, vol. 88(C), pages 466-482.
    8. Hollstein, Fabian & Prokopczuk, Marcel & Wese Simen, Chardin, 2020. "Beta uncertainty," Journal of Banking & Finance, Elsevier, vol. 116(C).
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    More about this item

    Keywords

    State variables; Macroeconomic risk; Linear asset pricing models; Individual stock returns; Time series and cross-sectional consistency;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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