Pricing Intertemporal Risk When Investment Opportunities Are Unobservable

Research output: Contribution to journalArticlepeer-review

Abstract

The intertemporal capital asset pricing model (ICAPM) predicts that an unobservable factor capturing changes in expected market returns should be priced in the cross section. My Bayesian framework accounts for uncertainty in the intertemporal risk factor and gauges the effects of prior information about investment opportunities on model inferences. Whereas an uninformative prior specification produces weak evidence that intertemporal risk is priced, incorporating prior information about market-return predictability generates a large space of ex ante reasonable priors in which the estimated intertemporal risk factor is positively priced. Overall, the cross-sectional tests reject the capital asset pricing model (CAPM) and indicate support for the ICAPM.

Original languageEnglish (US)
Pages (from-to)1759-1789
Number of pages31
JournalJournal of Financial and Quantitative Analysis
Volume54
Issue number4
DOIs
StatePublished - Aug 1 2019

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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