This paper studies the link between the main sources of fundamental risk and asset returns by using the common components of a large number of macroeconomic time series variables as factors in a pricing model. A three-factor model with two common components and the market return as factors is found to explain the crosssection of size and book-to-market sorted stock portfolios better than standa...

We show that decomposing macroeconomic risks across horizon is key to uncover a tight link between risk premia and the real economy. Exposure in four-year returns to innovations in macroeconomic growth and volatility with a matching half-life of over four years is priced in a wide variety of test assets. Shorter-term risks are not priced. Importantly, we show that long-term growth and volatilit...

a r t i c l e i n f o I propose a new multi-factor asset pricing model with new-Keynesian factors to explain stock return anomalies from 1972Q1 to 2009Q2. This new model explains the average returns across testing portfolios formed on financial distress, momentum, and standardized unexpected earnings with misspecification-robust statistics. Test portfolios formed on net stock issues and total a...

In this paper we develop a continuous-time general equilibrium model in a representative exchange economy with incomplete information. We show, in a multiple assets setting, that state uncertainty risk is priced and commands additional (state-dependent) premium. It is affected by both the investor’s estimate of the state of the economy, as well as the uncertainty about her estimation. Moreover,...

In this paper, we develop and test asset pricing model formulations that are simultaneously conditional and nonlinear. Formulations based upon five popular asset pricing models are tested against the widely studied Fama and French (1993) twenty-five size and book-tomarket sorted portfolios. Test results indicate that the conditional nonlinear specification of the Fama and French (1993) three st...

This paper examines the implications of pricing errors and factors that are not strong for Fama-MacBeth two-pass estimator risk premia its asymptotic distribution when T is fixed with n → ∞, both jointly. While literature just distinguishes weak we allow degrees strength using a recently developed measure. Our theoretical results have important practical empirical asset pricing. Pricing factor ...

Two different methods are used to evaluate the performance of the consumption-based asset pricing models to explain the cross-section of expected stock returns in conditional moments: one is to scale the returns, and the other is to model time-varying factor loadings, using instrument variables. Maximum correlation portfolios are constructed to directly impose restrictions on the time-series in...

This paper addresses the problem of hedging a portfolio of fixed-income cashflows. We first briefly review the traditional duration hedging method, which is heavily used by practitioners. That approach is based on a series of very restrictive and simplistic assumptions, including the assumptions of a small and parallel shift in the yield curve. We know however that large variations can affect t...

I examine determinants of stochastic relative risk aversion in conditional asset pricing models. I first develop time-series specification tests with nonlinear state-space models with heteroskedasticity based on Merton (1973)’s ICAPM. I then established the following facts. First, the surplus consumption ratio implied by the external habit formation model is the most important determinant of re...