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 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.
We would like to thank Elena Asparohova, Nicholas Barberis, Justin Birru, Ing-Haw Cheng, James Choi, Tony Cookson, William Diamond, Xavier Gabaix, Stefano Giglio, Niels Gormsen, Robin Greenwood, Arpit Gupta, Lars Hansen, Xing Huang, Alex Imas, Brian Kelly, Ralph Koijen, Ben Matthies, Marina Niessner, Lubos Pastor, Kelly Shue, Amir Sufi, David Solomon, Johannes Stroebel, Jessica Wachter, George Wu, Jeff Wurgler, and Anthony Zhang as well as seminar participants at Michigan State, Michigan, Chicago Booth, TCU, Utah, Georgia State, Yale, Rochester, and Colorado for extremely helpful comments and suggestions. We would also like to thank Abigail Bergman, Nicholas Herzog, and Kari Greenswag for excellent research assistance. Becky White and Jasmine Kwong provided invaluable help with data collection. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.