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Necessary Evidence For A Risk Factor’s Relevance

  • Series
  • Speaker(s)
    Samuel Hartzmark (University of Chicago Booth School of Business, United States)
  • Field
  • Location
  • Date and time

    October 07, 2020
    16:00 - 17:00

Textbook finance theory assumes that investors strategically try to insure themselves against bad future states of the world when forming portfolios. This is a testable assumption, surveys are ideally suited to test it, and we develop a framework for doing so. Our framework combines survey experiments with field data to test this assumption as it pertains to any candidate risk factor. We study consumption growth to demonstrate the approach. While participants strategically respond to changes in the mean and volatility of stock returns when forming their portfolios, there is no evidence that investors view this canonical risk factor as relevant.

Keywords: Risk Factors, Expected Returns, Correlation Neglect, Asset Pricing
JEL Classification: G12, G11, E21

Chinco, Alexander and Hartzmark, Samuel M. and Sussman, Abigail B., Necessary Evidence For A Risk Factor’s Relevance (April 29, 2020). Available at SSRN: https://ssrn.com/abstract=3487624 or http://dx.doi.org/10.2139/ssrn.3487624