Are Conditional Factors Priced? Characterizing Risk Premia of Conditional Systematic Risk Factors with Staggered Regressions

Abstract

We introduce the staggered Fama-MacBeth regression method and use it to evaluate economic significance of popular conditional systematic risk factors. Prior literature demonstrated that exposure to these factors is rewarded in the cross-section of stock returns. Much of the evidence comes from contemporaneous regressions; however, in predictive regressions, the evidence tends to disappear. The proposed staggered regression method combines the benefits of contemporaneous and predictive regressions while eliminating critical shortcomings. Using the method, we con rm the economic significance of downside risk, ð€€€, relative downside risk, ð€€€ð€€€ +, and coskewness, but not of exceedance correlations and related measures of asymmetric dependence.