Conditional Risk

Niels Joachim Gormsen, Christian Skov Jensen

Research output: Contribution to conferencePaperResearchpeer-review


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.
Original languageEnglish
Publication date2019
Number of pages66
Publication statusPublished - 2019
EventThe 79th Annual Meeting of American Finance Association. AFA 2019 - Hilton Atlanta, Atlanta, United States
Duration: 4 Jan 20196 Jan 2019
Conference number: 79


ConferenceThe 79th Annual Meeting of American Finance Association. AFA 2019
LocationHilton Atlanta
CountryUnited States
Internet address


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

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