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Volatility Risk Premium, Risk Aversion, and the Cross‐Section of Stock Returns

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  • Peter Nyberg
  • Anders Wilhelmsson

Abstract

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.

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  • Peter Nyberg & Anders Wilhelmsson, 2010. "Volatility Risk Premium, Risk Aversion, and the Cross‐Section of Stock Returns," The Financial Review, Eastern Finance Association, vol. 45(4), pages 1079-1100, November.
    • Handle: RePEc:bla:finrev:v:45:y:2010:i:4:p:1079-1100
    DOI: 10.1111/j.1540-6288.2010.00286.x
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    Cited by:

    1. Tim Bollerslev & George Tauchen & Hao Zhou, 2009. "Expected Stock Returns and Variance Risk Premia," The Review of Financial Studies, Society for Financial Studies, vol. 22(11), pages 4463-4492, November.

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