Ralitsa Petkova

• Purdue University West Lafayette

In this paper, we explain momentum profits using innovations in aggregate economy-wide default risk. First, we show that momentum returns are positive only during high default shocks and nonexistent otherwise. Second, we present evidence suggesting that a conditional default shock factor is priced in the cross-section and can explain a large portio...

Recent research on default risk has shown that most of the variation in credit spreads is driven by a common yet unidentifiable factor. I find that bond turnover explains up to 11% of this variation. Using the implications of an intertemporal capital asset pricing model, I construct a bond hedging portfolio from TRACE transactions data and relate i...

We decompose aggregate market variance into an average correlation component and an average variance component. Only the latter commands a negative price of risk in the cross section of portfolios sorted by idiosyncratic volatility. Portfolios with high (low) idiosyncratic volatility relative to the Fama-French (1993) model have positive (negative)...

We analyze the stock market risk-return relation over the period from 1927 to 2005. We empirically implement the Intertemporal Capital Asset Pricing Model (ICAPM) using a cross-section of stock and bond portfolios, and allow for the market price of risk to be time-varying. We show that including bond portfolios in the estimation not only significan...

We document a positive relation between the volatility of liquidity and expected returns. Our measure of liquidity is based on Amihud (2002) and its volatility is measured using daily data. We show that the volatility of liquidity effect is different from previously documented liquidity risks: the covariance of stock returns with aggregate liquidit...

Past research documents that momentum is positively related to default, yet the profitability of momentum is observed to be lower during recessions, when default concerns are potentially higher. We attempt to resolve this puzzle by analyzing the profitability of the momentum anomaly over time, conditional on both business cycles and unexpected chan...

We offer a risk-based explanation for the procyclical nature of momentum profits. We show that a model that contains the market return and innovations in market variance explains a large proportion of momentum profits in good times. The price of risk for market variance in good times is negative. Recent winners have high expected returns since winn...

We study the liquidity exposures of value and growth stocks over business cycles. In worst times, value stocks have higher liquidity betas than in best times, while the opposite holds for growth stocks. Small value stocks have higher liquidity exposures than small growth stocks in worst times, while small growth stocks have higher liquidity exposur...

Investors hold portfolios of assets with different risk-reward profiles for diversification benefits. Conditional on the volatility of assets, diversification benefits can vary over time depending on the correlation structure among asset returns. The correlation of returns between assets has varied substantially over time. To insure against future...

Glossary Definition of the Subject Introduction The Fama–French Model as a Linear Beta Pricing Model Explaining the Performance of the Fama–French Model: A Risk-Based Interpretation Other Risk-Based Interpretations Future Directions Bibliography

Investors hold portfolios of assets with different risk-reward profiles for diversification benefits. Conditional on the volatility of assets, diversification benefits can vary over time depending on the correlation structure among asset returns. The correlation of returns between assets has varied substantially over time. To insure against future...

The trustees of funded defined benefit pension schemes must make two vital and inter-related decisions - setting the asset allocation and the contribution rate. While these decisions are usually taken separately, it is argued that they are intimately related and should be taken jointly. The objective of funded pension schemes is taken to be the min...

The Fama-French factors HML and SMB are correlated with innovations in variables that describe investment opportunities. A model that includes shocks to the aggregate dividend yield and term spread, default spread, and one-month Treasury-bill yield explains the cross section of average returns better than the Fama-French model. When loadings on the...

Bonds are attractive investment instruments that complement a broad-based equity portfolio. As the correlation between stocks and bonds increases, investors lose diversification benefits. Stocks that pay out more in states in which the aggregate stock-bond correlation is high will be deemed more attractive and their expected returns should be lower...

We study the relative risk of value and growth stocks. We find that time-varying risk goes in the right direction in explaining the value premium. Value betas tend to covary positively, and growth betas tend to covary negatively with the expected market risk premium. Our inference differs from that of previous studies because we sort betas on the e...

A number of studies have presented evidence rejecting the ability of unconditional linear factor models to fully explain the cross-section of expected returns. In a recent paper, however, Pastor and MacKinlay (1999) argue that it is too early to discard these models since they can be quite useful in portfolio optimization. This paper builds on thei...

According to the international arbitrage pricing theory (IAPT) posited by Solnik (1983), home currency movements affect factor loadings and associated risk premiums. We propose an empirical model to test this proposition and perform tests using U.S. stock returns in the period 1975-2008. Our results confirm that currency movements significantly aff...