Keynes meets Merton: Examining risk and return relation based on fundamentals
Publication Type
Working Paper
Version
publishedVersion
Publication Date
12-2020
Abstract
Although the intertemporal risk-return relation should be positive theoretically, it is often documented to be weak and even negative empirically. More accurate measures for return and risk have been proposed as remedies to address this discrepancy. We find that those remedies are fragile with mixed results since they do not control for the non-fundamental component of returns, which is the key that drives the weak or negative relation between risk and return. Upon controlling for the non-fundamental component, those remedies are no longer fragile and the positive risk and return relation can be restored robustly.
Keywords
Risk-Return Relation, Return Forecasting, Fundamental Predictors, Behavioral Bias
Discipline
Finance | Finance and Financial Management
Research Areas
Finance
First Page
1
Last Page
42
Publisher
SSRN
Citation
CHU, Liya; SHI, Wenyun; and Jun TU.
Keynes meets Merton: Examining risk and return relation based on fundamentals. (2020). 1-42.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/6798
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
External URL
https://ssrn.com/abstract=3403904