Scientific article

Time-Varying Risk Premium in Large Cross-Sectional Equity Data Sets

Published inEconometrica, vol. 84, p. 985-1046
  • SFI Research Paper; 11-40
Publication date2016

We develop an econometric methodology to infer the path of risk premia from a large unbalanced panel of individual stock returns. We estimate the time-varying risk premia implied by conditional linear asset pricing models where the conditioning includes both instruments common to all assets and asset specific instruments. The estimator uses simple weighted two-pass cross-sectional regressions, and we show its consistency and asymptotic normality under increasing cross-sectional and time series dimensions. We address consistent estimation of the asymptotic variance by hard thresholding, and testing for asset pricing restrictions induced by the no-arbitrage assumption. We derive the restrictions given by a continuum of assets in a multi-period economy under an approximate factor structure robust to asset repackaging. The empirical analysis on returns for about ten thousands US stocks from July 1964 to December 2009 shows that risk premia are large and volatile in crisis periods. They exhibit large positive and negative strays from time-invariant estimates, follow the macroeconomic cycles, and do not match risk premia estimates on standard sets of portfolios. The asset pricing restrictions are rejected for a conditional four-factor model capturing market, size, value and momentum effects.

  • Large panel
  • Factor model
  • Risk premium
  • Asset pricing
  • Sparsity
  • Thresholding
Citation (ISO format)
GAGLIARDINI, Patrick, OSSOLA, Elisa, SCAILLET, Olivier. Time-Varying Risk Premium in Large Cross-Sectional Equity Data Sets. In: Econometrica, 2016, vol. 84, p. 985–1046. doi: 10.3982/ECTA11069
Main files (1)
Article (Published version)
ISSN of the journal0012-9682

Technical informations

Creation07/25/2016 12:42:00 PM
First validation07/25/2016 12:42:00 PM
Update time03/15/2023 12:34:29 AM
Status update03/15/2023 12:34:28 AM
Last indexation01/16/2024 9:21:45 PM
All rights reserved by Archive ouverte UNIGE and the University of GenevaunigeBlack