Volatility Risk Premium, Risk Aversion and the Cross-Section of Stock Returns

Research output: Contribution to journalArticle

Abstract

We test if innovations in investor risk aversion are a priced factor in the stock market. Time series tests show that the new factor partly explains the strong momentum effect in stock returns. Furthermore, using 25 portfolios sorted on book-to-market and size as test assets, our new factor together with the market factor explains 64% of the variation in
average returns compared to 60% for the Fama-French model. The new factor is generally significant with an estimated risk premium close to its time series mean also when industry portfolios and portfolios sorted on previous returns are augmented to the test assets.

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Research areas and keywords

Subject classification (UKÄ) – MANDATORY

  • Business Administration
  • Economics

Keywords

  • volatility risk premium, Asset pricing, risk aversion, momentum, habit formation
Original languageEnglish
Pages (from-to)1079-1100
JournalFinancial Review
Publication statusPublished - 2010
Publication categoryResearch
Peer-reviewedYes