What Does the Cross-Section Tell About Itself? Explaining Equity Risk Premia with Stock Return Moments

Download or read book What Does the Cross-Section Tell About Itself? Explaining Equity Risk Premia with Stock Return Moments written by Ilan Cooper and published by . This book was released on 2019 with total page 79 pages. Available in PDF, EPUB and Kindle. Book excerpt: We derive a parsimonious three-factor asset pricing model (cross-sectional CAPM, CS-CAPM) in which stock return dispersion (realized cross-sectional variance of long-short equity portfolios) and stock return skewness (realized cross-sectional skewness of equity portfolios) are the driving forces in pricing cross-sectional equity risk premia. Market segmentation leads these two factors to be priced in equilibrium. The model offers a large fit for the joint cross-sectional risk premia associated with 16 prominent CAPM anomalies, with explanatory ratios above 40%. The CS-CAPM compares favorably with multifactor models widely used in the literature. The cross-sectional factors are not subsumed by traditional macro risk factors.