Risk and the cross section of stock returns

Radu Burlacu, Patrice Fontaine, Sonia Jimenez-Garcès, Mark S. Seasholes

Research output: Contribution to journalArticle

1 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)511-522
Number of pages12
JournalJournal of Financial Economics
Volume105
Issue number3
DOIs
StatePublished - Sep 2012

Keywords

  • Cross-sectional asset pricing
  • REE models
  • Risk premiums

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

Fingerprint Dive into the research topics of 'Risk and the cross section of stock returns'. Together they form a unique fingerprint.

  • Cite this