Research / BFI Working PaperFeb 28, 2022

Dynamics of Subjective Risk Premia

Stefan Nagel, Zhengyang Xu

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.

More Research From These Scholars

BFI Working Paper Nov 28, 2022

Inflation Hedging on Main Street? Evidence from Retail TIPS Fund Flows

Stefan Nagel, Zhen Yan
Topics:  Financial Markets
BFI Working Paper May 2, 2022

Expectations Data in Asset Pricing

Klaus Adam, Stefan Nagel
Topics:  Financial Markets
BFI Working Paper Jun 15, 2020

Treasury Inconvenience Yields during the COVID-19 Crisis

Zhiguo He, Stefan Nagel, Zhaogang Song
Topics:  COVID-19, Financial Markets