Volatility Risk Premium, Risk Aversion and the Cross-Section of Stock Returns
We test if innovations in investor risk aversion are a priced factor in the stock market. Time series tests show that the new factor partly explains the strong momentum effect in stock returns. Furthermore, using 25 portfolios sorted on book-to-market and size as test assets, our new factor together with the market factor explains 64% of the variation in average returns compared to 60% for the Fam