Dynamics of Subjective Risk Premia / Stefan Nagel, Zhengyang Xu.

By:

Nagel, Stefan

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w29803.Publication details: Cambridge, Mass. National Bureau of Economic Research 2022.Description: 1 online resource: illustrations (black and white)Subject(s):

G12 - Asset Pricing • Trading Volume • Bond Interest Rates
G41 - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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Abstract: We examine subjective risk premia implied by return expectations of individual investors and professionals for aggregate portfolios of stocks, bonds, currencies, and commodity futures. While in-sample predictive regressions with realized excess returns suggest that objective risk premia vary countercyclically with business cycle variables and aggregate asset valuation measures, subjective risk premia extracted from survey data do not comove much with these variables. This lack of cyclicality of subjective risk premia is a pervasive property that holds in expectations of different groups of market participants and in different asset classes. A similar lack of cyclicality appears in out-of-sample forecasts of excess returns, which suggests that investors' learning of forecasting relationships in real time may explain much of the cyclicality gap. These findings cast doubt on models that explain time-varying objective risk premia inferred from in-sample regressions with countercyclical variation in perceived risk or risk aversion. We further find a link between subjective perceptions of risk and subjective risk premia, which points toward a positive risk-return tradeoff in subjective beliefs.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w29803 (Browse shelf(Opens below))	Not For Loan

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February 2022.

We examine subjective risk premia implied by return expectations of individual investors and professionals for aggregate portfolios of stocks, bonds, currencies, and commodity futures. While in-sample predictive regressions with realized excess returns suggest that objective risk premia vary countercyclically with business cycle variables and aggregate asset valuation measures, subjective risk premia extracted from survey data do not comove much with these variables. This lack of cyclicality of subjective risk premia is a pervasive property that holds in expectations of different groups of market participants and in different asset classes. A similar lack of cyclicality appears in out-of-sample forecasts of excess returns, which suggests that investors' learning of forecasting relationships in real time may explain much of the cyclicality gap. These findings cast doubt on models that explain time-varying objective risk premia inferred from in-sample regressions with countercyclical variation in perceived risk or risk aversion. We further find a link between subjective perceptions of risk and subjective risk premia, which points toward a positive risk-return tradeoff in subjective beliefs.