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Risk Price Variation: The Missing Half of Empirical Asset Pricing

Publication ,  Journal Article
Patton, AJ; Weller, BM
Published in: Review of Financial Studies
November 1, 2022

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.

Duke Scholars

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Published In

Review of Financial Studies

DOI

EISSN

1465-7368

ISSN

0893-9454

Publication Date

November 1, 2022

Volume

35

Issue

11

Start / End Page

5127 / 5184

Related Subject Headings

  • Finance
  • 3801 Applied economics
  • 3502 Banking, finance and investment
  • 1502 Banking, Finance and Investment
  • 1402 Applied Economics
  • 1401 Economic Theory
 

Citation

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Patton, A. J., & Weller, B. M. (2022). Risk Price Variation: The Missing Half of Empirical Asset Pricing. Review of Financial Studies, 35(11), 5127–5184. https://doi.org/10.1093/rfs/hhac012
Patton, A. J., and B. M. Weller. “Risk Price Variation: The Missing Half of Empirical Asset Pricing.” Review of Financial Studies 35, no. 11 (November 1, 2022): 5127–84. https://doi.org/10.1093/rfs/hhac012.
Patton AJ, Weller BM. Risk Price Variation: The Missing Half of Empirical Asset Pricing. Review of Financial Studies. 2022 Nov 1;35(11):5127–84.
Patton, A. J., and B. M. Weller. “Risk Price Variation: The Missing Half of Empirical Asset Pricing.” Review of Financial Studies, vol. 35, no. 11, Nov. 2022, pp. 5127–84. Scopus, doi:10.1093/rfs/hhac012.
Patton AJ, Weller BM. Risk Price Variation: The Missing Half of Empirical Asset Pricing. Review of Financial Studies. 2022 Nov 1;35(11):5127–5184.
Journal cover image

Published In

Review of Financial Studies

DOI

EISSN

1465-7368

ISSN

0893-9454

Publication Date

November 1, 2022

Volume

35

Issue

11

Start / End Page

5127 / 5184

Related Subject Headings

  • Finance
  • 3801 Applied economics
  • 3502 Banking, finance and investment
  • 1502 Banking, Finance and Investment
  • 1402 Applied Economics
  • 1401 Economic Theory