In this paper we study the pricing of betas that are hard to predict. We argue that in a world where investors cannot perfectly predict betas, the degree of beta predictability should matter for the extent to which these betas are priced. We show this is in a model with ambiguity averse investors that are uncertain about an asset’s risk exposure to an exogenous risk. By taking the perspective of an investor, we provide empirical evidence to support this model, where downside, size and book-to-market betas which are hard to predict, are also not priced when we use betas that would be available to investors when these make their decisions.
|Journal||Journal of Financial Economics|
|Publication status||Accepted/In press - Dec 2019|
- risk factors
- ambiguity aversion
- risk hedging