Joint work with Hannes Mohrschladt
Abstract: We examine the time-series and cross-section of stock market risk premia from the perspective of financial analysts. Our novel approach is based on the notion that analysts' stock recommendations reflect both their subjective return expectations and their perceived stock risk. Thus, we can empirically infer presumed risk premia from recommendations and target price implied expected returns. We show that analysts' presumed risk premia are strongly countercyclical such that their correlation with the VIX is 72%. Moreover, they predict future stock market returns and are closely related to the price-dividend ratio and other cyclical state variables. In the cross-section, the presumed risk premia are comparably large for high-beta, small, and value stocks lending support to a risk-based interpretation of these characteristics.
Available at SSRN