Pricing Intertemporal Risk When Investment Opportunities Are Unobservable
AffiliationUniv Arizona, Eller Coll Management
MetadataShow full item record
PublisherCAMBRIDGE UNIV PRESS
CitationCederburg, S. (2018). Pricing intertemporal risk when investment opportunities are unobservable. Journal of Financial and Quantitative Analysis, 1-31.
Rights© Michael G. Foster School of Business, University of Washington 2018.
Collection InformationThis item from the UA Faculty Publications collection is made available by the University of Arizona with support from the University of Arizona Libraries. If you have questions, please contact us at firstname.lastname@example.org.
AbstractThe 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.
VersionFinal accepted manuscript