Publication Type
Journal Article
Version
publishedVersion
Publication Date
2-2022
Abstract
Equal compensation across assets for the same risk exposures is a bedrock of asset pricing theory and empirics. Yet real-world frictions can violate this equality and create apparently high Sharpe ratio opportunities. We develop new methods for asset pricing with cross-sectional heterogeneity in compensation for risk. We extend k-means clustering to group assets by risk prices and introduce a formal test for whether differences in risk premiums across market segments are too large to occur by chance. We find significant evidence of cross-sectional variation in risk prices for almost all combinations of test assets, factor models, and time periods considered.
Discipline
Econometrics | Finance
Research Areas
Econometrics
Publication
Review of Financial Studies
Volume
35
Issue
11
First Page
5127
Last Page
5184
ISSN
0893-9454
Identifier
10.1093/rfs/hhac012
Publisher
Oxford University Press
Citation
PATTON, Andrew John and WELLER, Brian M..
Risk price variation: The missing half of empirical asset pricing. (2022). Review of Financial Studies. 35, (11), 5127-5184.
Available at: https://ink.library.smu.edu.sg/soe_research/2889
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1093/rfs/hhac012