Premium
Volatility Risk Premium, Risk Aversion, and the Cross‐Section of Stock Returns
Author(s) -
Nyberg Peter,
Wilhelmsson Anders
Publication year - 2010
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.2010.00286.x
Subject(s) - economics , risk premium , econometrics , financial economics , volatility (finance) , stock (firearms) , capital asset pricing model , stock market , risk aversion (psychology) , expected utility hypothesis , mechanical engineering , paleontology , horse , engineering , biology
We test if innovations in investor risk aversion are a priced factor in the stock market. 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.