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Conditional risk

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  • Gormsen, Niels Joachim
  • Jensen, Christian Skov

Abstract

We study the extent to which time-variation in market betas influence estimates of CAPM alphas. Given the observed variation in conditional market betas, market risk premia, and market variance, the required compensation for conditional market risk can, in theory, be as large as the unconditional equity premium. We implement the conditional CAPM using state-of-the-art methods in a broad global sample. We find that accounting for conditional risk helps explain the return on all the major anomalies we consider and that conditional risk explains two percentage points of alpha for value, investment, and momentum strategies in recent years.

Suggested Citation

  • Gormsen, Niels Joachim & Jensen, Christian Skov, 2024. "Conditional risk," Journal of Financial Economics, Elsevier, vol. 162(C).
    • Handle: RePEc:eee:jfinec:v:162:y:2024:i:c:s0304405x24001569
    DOI: 10.1016/j.jfineco.2024.103933
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    References listed on IDEAS

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    Cited by:

    1. Asness, Cliff & Frazzini, Andrea & Gormsen, Niels Joachim & Pedersen, Lasse Heje, 2020. "Betting against correlation: Testing theories of the low-risk effect," Journal of Financial Economics, Elsevier, vol. 135(3), pages 629-652.

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    More about this item

    Keywords

    Asset pricing; Conditional CAPM; Factor models; Time-varying discount rates;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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