An Intertemporal Risk Factor Model
112 Pages Posted: 1 Sep 2020 Last revised: 19 May 2021
Date Written: May 19, 2021
Previous factor models do not represent theoretically relevant risks. To address this issue, we implement a tradable ICAPM capturing market and intertemporal risk. We construct our intertemporal risk factors as long-short portfolios based on stock exposures to dividend yield and realized volatility, and show that they reflect mimicking portfolios for long-term expected returns and volatility. The estimated risk price signs are consistent with the ICAPM and their magnitudes imply moderate risk aversion. Our intertemporal factor model performs well relative to previous models in terms of its tangency Sharpe ratio, and its pricing of single stocks and portfolios prior literature recommends.
Keywords: ICAPM, Intertemporal Risk, Long-term Investors, Factor Models
JEL Classification: G10, G11, G12
Suggested Citation: Suggested Citation