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Understanding Risk and Return

  • John Y. Campbell

This paper uses an intertemporal equilibrium asset pricing model to interpret the cross-sectional pattern of stock and bond returns. The model relates assets' mean returns to their covariances with the contemporaneous return and news about future returns on the market portfolio. In a departure from standard practice, the market portfolio return is measured using data on both the aggregate stock market and aggregate labor income. The paper finds that aggregate stock market risk is the main factor determining excess stock and bond returns, but that the price of stock market risk does not equal the coefficient of relative risk aversion as would be implied by the static Capital Asset Pricing Model.

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File URL: http://www.nber.org/papers/w4554.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4554.

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Date of creation: Nov 1993
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Publication status: published as Journal of Political Economy, April 1996, Vol.104,no.2, pp.298-345.
Handle: RePEc:nbr:nberwo:4554
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