TY - JOUR
T1 - Risk and the cross section of stock returns
AU - Burlacu, Radu
AU - Fontaine, Patrice
AU - Jimenez-Garcès, Sonia
AU - Seasholes, Mark S.
N1 - Funding Information:
We thank Flavio Bazzana, Bruno Biais, Denis Gromb, Soeren Hvidkjaer, Michael Lemmon, Joel Peress and Bruno Solnik for helpful comments as well as seminar participants at Centre d'Études et de Recherches Appliquées à la Gestion (CERAG), City University of Hong Kong, Hong Kong University of Science and Technology, Nanyang Technological University Singapore, Toulouse University, University of California Berkeley Haas School of Business, Université Catholique de Louvain, University of New South Wales, University of Paris Dauphine, the Association of French Finance (AFFI) Lille 2008 Conference, and the Econometric Society 2009 North American Summer Meetings. Radu Burlacu, Patrice Fontaine, and Sonia Jimenez-Garcès acknowledge support from the National Center of Scientific Research (CNRS) and Région Rhône-Alpes. Mark Seasholes acknowledges support from the Hong Kong Research Grants Council .
PY - 2012/9
Y1 - 2012/9
N2 - This paper mathematically transforms unobservable rational expectation equilibrium model parameters (information precision and supply uncertainty) into a single variable that is correlated with expected returns and that can be estimated with recently observed data. Our variable can be used to explain the cross section of returns in theoretical, numerical, and empirical analyses. Using Center for Research in Security Prices data, we show that a -1σ to +1σ change in our variable is associated with a 0.31% difference in average returns the following month (equaling 3.78% per annum). The results are statistically significant at the 1% level. Our results remain economically and statistically significant after controlling for stocks' market capitalizations, book-to-market ratios, liquidities, and the probabilities of information-based trading.
AB - This paper mathematically transforms unobservable rational expectation equilibrium model parameters (information precision and supply uncertainty) into a single variable that is correlated with expected returns and that can be estimated with recently observed data. Our variable can be used to explain the cross section of returns in theoretical, numerical, and empirical analyses. Using Center for Research in Security Prices data, we show that a -1σ to +1σ change in our variable is associated with a 0.31% difference in average returns the following month (equaling 3.78% per annum). The results are statistically significant at the 1% level. Our results remain economically and statistically significant after controlling for stocks' market capitalizations, book-to-market ratios, liquidities, and the probabilities of information-based trading.
KW - Cross-sectional asset pricing
KW - REE models
KW - Risk premiums
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U2 - 10.1016/j.jfineco.2012.03.008
DO - 10.1016/j.jfineco.2012.03.008
M3 - Article
AN - SCOPUS:84862774869
SN - 0304-405X
VL - 105
SP - 511
EP - 522
JO - Journal of Financial Economics
JF - Journal of Financial Economics
IS - 3
ER -