Necessary Evidence For A Risk Factor’s Relevance

Alexander M. Chinco, Samuel M. Hartzmark and Abigail B. Sussman

No 27227, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Textbook finance theory assumes that investors strategically try to insure themselves against bad future states of the world when forming portfolios. This is a testable assumption, surveys are ideally suited to test it, and we develop a framework for doing so. Our framework combines survey experiments with field data to test this assumption as it pertains to any candidate risk factor. We study consumption growth to demonstrate the approach. While participants strategically respond to changes in the mean and volatility of stock returns when forming their portfolios, there is no evidence that investors view this canonical risk factor as relevant.

JEL-codes: D81 D91 E21 G11 G12 G4 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-mac, nep-ore and nep-rmg
Note: AP
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