The value premium,aggregate risk innovations,and average stock returns |
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| Affiliation: | 1. School of Management, Boston University, 595 Commonwealth Avenue, Boston, MA 02215, USA;2. College of Business and Public Administration, University of North Dakota, 293 Centennial Drive, Grand Forks, ND 58202, USA;1. Escuela de Negocios, Universidad Adolfo Ibáñez, Diagonal Las Torres 2640 Office 533-C, 7941169, Peñalolén, Santiago, Chile;2. Financial Regulation Center – CREM, Faculty of Economics and Business, Universidad de Chile, Santiago, Chile;1. Bangor University, UK;2. University of Nottingham, UK;3. INCEIF (International Centre for Education in Islamic Finance), Malaysia;1. DeVry University (Dallas Campus), College of Business and Management, Irving, TX, United States;2. Tanta University, College of Business, Tanta, Egypt;3. University of Texas at Arlington, Arlington, TX, United States;1. Mahidol University International College (MUIC), Nakhon Pathom, Thailand;2. School of Graduate Professional Studies (SGPS), Pennsylvania State University, Malvern, PA 19355, USA;3. State University of New York (SUNY) at New Paltz, School of Business, New Paltz, NY 1256, USA;4. College of Management, Mahidol University (CMMU), Bangkok, Thailand;5. School of Business Administration, The National Institute of Development Administration (NIDA), Bangkok, Thailand;6. International College, The National Institute of Development Administration (NIDA), Bangkok, Thailand |
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| Abstract: | ![]()
We test whether innovations in aggregate risk, interpolated from a vector autoregressive system that contains the Chen et al. (1986) five factors as in Petkova (2006), are common factors in cross-sectional stock returns. We provide direct evidence that innovation in industrial production growth, a classical business-cycle variable that summarizes the state of the economy, is associated with the cross-sectional return predictability of individual stocks. We conclude that the role of innovation in aggregate risk is not random, and furthermore that it provides guidance concerning an important source of nonfinancial market-based risk in asset returns. |
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| Keywords: | Firm size Book-to-market Risk innovations Industrial production growth Investment opportunity |
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