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

External URL

https://ssrn.com/abstract=3403904

This document is currently not available here.

Share

COinS