Necessary Evidence For A Risk Factor’s Relevance

Textbook finance theory assumes that investors strategically try to insure themselves against bad future states of the world when forming portfolios. This is a testable assumption, surveys are ideally suited to test it, and we develop a framework for doing so. Our framework combines survey experimen...

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Bibliographic Details
Published in:NBER Working Paper Series 2020-05
Main Authors: Chinco, Alexander M, Hartzmark, Samuel M, Sussman, Abigail B
Format: Article
Language:English
Subjects:
Economic theory
Risk factors
Online Access:Get full text
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Summary:Textbook finance theory assumes that investors strategically try to insure themselves against bad future states of the world when forming portfolios. This is a testable assumption, surveys are ideally suited to test it, and we develop a framework for doing so. Our framework combines survey experiments with field data to test this assumption as it pertains to any candidate risk factor. We study consumption growth to demonstrate the approach. While participants strategically respond to changes in the mean and volatility of stock returns when forming their portfolios, there is no evidence that investors view this canonical risk factor as relevant.
ISSN:0898-2937
DOI:10.3386/w27227