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Hao Zhou: Risk, Uncertainty, and Expected Returns

Time:2016-11-09 By: Print

 

Turan Bali, Hao Zhou,Risk, Uncertainty, and Expected Returns” Journal of Financial and Quantitative Analysis, forthcoming, 2015.

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, momentum, and industry portfolios indicate that the conditional covariances of equity portfolios 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 8 percent premium relative to portfolios that are minimally correlated with VRP.

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