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An Intertemporal Risk Factor Model

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  • Fousseni Chabi-Yo

    (Isenberg School of Management, University of Massachusetts, Amherst, Massachusetts 01003)

  • Andrei S. Gonçalves

    (Fisher College of Business, The Ohio State University, Columbus, Ohio 43210)

  • Johnathan A. Loudis

    (Mendoza College of Business, University of Notre Dame, Notre Dame, Indiana 46556)

Abstract

Prominent factor models are based on tradable factors that do not represent theoretically relevant risks. To address this issue, we develop a factor model that captures the risks to long-term investors present in the intertemporal capital asset pricing model (ICAPM). Empirically, we construct intertemporal risk factors as long-short portfolios based on stock exposures to dividend yield and realized variance. These tradable factors mimic news to long-term expected returns and volatility, and they offset part of the marginal utility increase in recessions induced by wealth declines. Our intertemporal factor model estimation implies significant risk prices that are consistent with the ICAPM restrictions under moderate risk aversion. Moreover, our model performs well relative to previous factor models in terms of its tangency Sharpe ratio and its pricing of key test assets, including single stocks, industry portfolios, and portfolios sorted on risk exposures and lagged anomalies.

Suggested Citation

  • Fousseni Chabi-Yo & Andrei S. Gonçalves & Johnathan A. Loudis, 2025. "An Intertemporal Risk Factor Model," Management Science, INFORMS, vol. 71(8), pages 6518-6544, August.
    • Handle: RePEc:inm:ormnsc:v:71:y:2025:i:8:p:6518-6544
    DOI: 10.1287/mnsc.2023.00261
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