Conditional Risk

Niels Joachim Gormsen, Christian Skov Jensen

Publikation: KonferencebidragPaperForskningpeer review

Resumé

We present a new direct methodology to study conditional risk, that is, the extra return compensation for time-variation in risk. We show theoretically that the conditional part of the CAPM can be captured by augmenting the standard market model with a conditional-risk factor, which is a specific market timing strategy. Both in the U.S. and global sample covering 23 countries, all major equity risk factors load on our conditional-risk factor, implying that each factor has a higher conditional market beta when the market risk premium is high or the market variance is low. Accordingly, these factor returns can be partly explained by conditional risk. Studying the economic drivers of these results, we find evidence that conditional risk arises from variation in discount rate betas (not cash flow betas) due to the endogenous effects of arbitrage trading.
OriginalsprogEngelsk
Publikationsdato2019
Antal sider66
StatusUdgivet - 2019
BegivenhedThe 79th Annual Meeting of American Finance Association. AFA 2019 - Hilton Atlanta, Atlanta, USA
Varighed: 4 jan. 20196 jan. 2019
Konferencens nummer: 79
https://editorialexpress.com/conference/AFA2019/program/AFA2019.html

Konference

KonferenceThe 79th Annual Meeting of American Finance Association. AFA 2019
Nummer79
LokationHilton Atlanta
LandUSA
ByAtlanta
Periode04/01/201906/01/2019
Internetadresse

Emneord

  • Asset pricing
  • Conditional CAPM
  • Factor models
  • Time-varying discount rates

Citer dette

Gormsen, N. J., & Jensen, C. S. (2019). Conditional Risk. Afhandling præsenteret på The 79th Annual Meeting of American Finance Association. AFA 2019, Atlanta, USA.
Gormsen, Niels Joachim ; Jensen, Christian Skov . / Conditional Risk. Afhandling præsenteret på The 79th Annual Meeting of American Finance Association. AFA 2019, Atlanta, USA.66 s.
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Gormsen, NJ & Jensen, CS 2019, 'Conditional Risk' Paper fremlagt ved The 79th Annual Meeting of American Finance Association. AFA 2019, Atlanta, USA, 04/01/2019 - 06/01/2019, .

Conditional Risk. / Gormsen, Niels Joachim; Jensen, Christian Skov .

2019. Afhandling præsenteret på The 79th Annual Meeting of American Finance Association. AFA 2019, Atlanta, USA.

Publikation: KonferencebidragPaperForskningpeer review

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AU - Jensen, Christian Skov

PY - 2019

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N2 - We present a new direct methodology to study conditional risk, that is, the extra return compensation for time-variation in risk. We show theoretically that the conditional part of the CAPM can be captured by augmenting the standard market model with a conditional-risk factor, which is a specific market timing strategy. Both in the U.S. and global sample covering 23 countries, all major equity risk factors load on our conditional-risk factor, implying that each factor has a higher conditional market beta when the market risk premium is high or the market variance is low. Accordingly, these factor returns can be partly explained by conditional risk. Studying the economic drivers of these results, we find evidence that conditional risk arises from variation in discount rate betas (not cash flow betas) due to the endogenous effects of arbitrage trading.

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KW - Asset pricing

KW - Conditional CAPM

KW - Factor models

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KW - Asset pricing

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Gormsen NJ, Jensen CS. Conditional Risk. 2019. Afhandling præsenteret på The 79th Annual Meeting of American Finance Association. AFA 2019, Atlanta, USA.