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Risk and the cross section of stock returns

Author

Listed:
  • R. Burlacu

    (CEREFIGE - Centre Européen de Recherche en Economie Financière et Gestion des Entreprises - UL - Université de Lorraine)

  • P. Fontaine

    (CERAG - Centre d'études et de recherches appliquées à la gestion - UPMF - Université Pierre Mendès France - Grenoble 2 - CNRS - Centre National de la Recherche Scientifique)

  • S. Jimenez-Garces

    (COACTIS - COnception de l'ACTIon en Situation - UL2 - Université Lumière - Lyon 2 - UJM - Université Jean Monnet - Saint-Étienne)

  • M. Seasholes

    (HKUST - Hong Kong University of Science and Technology)

Abstract

This paper mathematically transforms unobservable rational expectation equilibrium model parameters (information precision and supply uncertainty) into a single variable that is correlated with expected returns and that can be estimated with recently observed data. Our variable can be used to explain the cross section of returns in theoretical, numerical, and empirical analyses. Using Center for Research in Security Prices data, we show that a -1 sigma to +1 sigma change in our variable is associated with a 0.31% difference in average returns the following month (equaling 3.78% per annum). The results are statistically significant at the 1% level. Our results remain economically and statistically significant after controlling for stocks' market capitalizations, book-to-market ratios, liquidities, and the probabilities of information-based trading.

Suggested Citation

  • R. Burlacu & P. Fontaine & S. Jimenez-Garces & M. Seasholes, 2012. "Risk and the cross section of stock returns," Post-Print halshs-00755973, HAL.
    • Handle: RePEc:hal:journl:halshs-00755973
    DOI: 10.1016/j.jfineco.2012.03.008
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    Cited by:

    1. Campbell R. Harvey & Yan Liu & Heqing Zhu, 2014. ". . . and the Cross-Section of Expected Returns," NBER Working Papers 20592, National Bureau of Economic Research, Inc.
    2. Francisco Ruge‐Murcia, 2017. "Skewness Risk and Bond Prices," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 32(2), pages 379-400, March.

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