Understanding Risk and Return
- 1 April 1996
- journal article
- Published by University of Chicago Press in Journal of Political Economy
- Vol. 104 (2) , 298-345
- https://doi.org/10.1086/262026
Abstract
This paper uses an equilibrium multifactor model to interpret the cross-sectional pattern of postwar U.S. stock and bond returns. Priced factors include the return on a stock index, revisions in fore- casts of future stock returns (to capture intertemporal hedgiqg ef- fects), and revisions in forecasts of future labor income growth (proxies for the return on human capital). Aggregate stock market risk is the main factor determining excess returns; but in the pres- ence of human capital or stock market mean reversion, the coeffi- cient of relative risk aversion is much higher than the price of stock market risk.Keywords
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