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Journal of Financial Economics Vol. 105 No. 3 2012

Risk and the cross section of stock returns

Radu Burlacu1,2; Patrice Fontaine3,4; Sonia Jimenez-Garcès5; Mark S. Seasholes6,7

1 Centre Européen de Recherche en Economie Financière et Gestion des Entreprises · 2 Université de Lorraine · 3 Centre National de la Recherche Scientifique · 4 Université Grenoble Alpes · 5 Université Claude Bernard Lyon 1 · 6 Hong Kong University of Science and Technology · 7 University of Hong Kong

Abstract

This paper mathematically transforms unobservable rational expectation equilibrium model parameters (information precision and supply uncertainty) into a single variable that is correlated with expected returns and that can be estimated with recently observed data. Our variable can be used to explain the cross section of returns in theoretical, numerical, and empirical analyses. Using Center for Research in Security Prices data, we show that a −1σ to +1σ change in our variable is associated with a 0.31% difference in average returns the following month (equaling 3.78% per annum). The results are statistically significant at the 1% level. Our results remain economically and statistically significant after controlling for stocks' market capitalizations, book-to-market ratios, liquidities, and the probabilities of information-based trading.

DOI
10.1016/j.jfineco.2012.03.008
Volume
105
Issue
3
Pages
511-522
Language
en
Sources
openalex crossref bibtex:phds-export.bib

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