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A New Test of Risk Factor Relevance

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  • ALEX CHINCO
  • SAMUEL M. HARTZMARK
  • ABIGAIL B. SUSSMAN

Abstract

Textbook models assume that investors try to insure against bad states of the world associated with specific risk factors when investing. This is a testable assumption and we develop a survey framework for doing so. Our framework can be applied to any risk factor. We demonstrate the approach using consumption growth, which makes our results applicable to most modern asset‐pricing models. Participants respond to changes in the mean and volatility of stock returns consistent with textbook models, but we find no evidence that they view an asset's correlation with consumption growth as relevant to investment decisions.

Suggested Citation

  • Alex Chinco & Samuel M. Hartzmark & Abigail B. Sussman, 2022. "A New Test of Risk Factor Relevance," Journal of Finance, American Finance Association, vol. 77(4), pages 2183-2238, August.
    • Handle: RePEc:bla:jfinan:v:77:y:2022:i:4:p:2183-2238
    DOI: 10.1111/jofi.13135
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