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Volatility Risk Premium, Risk Aversion, and the Cross-Section of Stock Returns


  • We thank Hao Zhou for kindly providing data. We received valuable comments from seminar participants at the University of Lund, the Joint Finance Research Seminar in Helsinki, the CREATES seminar in Aarhus, and the Southern Finance Association Meetings in Florida. We also thank Bruno Gerard, Jesper Rangvid, and an anonymous referee for their comments. This article was partly written when the authors were visiting the Aarhus School of Business.

Corresponding author: Helsinki School of Economics, Department of Accounting and Finance, P.O. Box 1210, 00101 Helsinki, Finland; Phone: +358(0)9 43138 245; Fax: +358(0)9 4313 8678; E-mail:


We test if innovations in investor risk aversion are a priced factor in the stock market. 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 Fama-French model. The new factor is generally significant with an estimated risk premium close to its time series mean also when industry portfolios and portfolios sorted on previous returns are augmented to the test assets.