Andrei Gonçalves

The Subjective Risk and Risk Premia of Institutional Investors

We use the long-term Capital Market Assumptions of asset managers and institutional investors’ consultants from 1988 to 2022 to provide three stylized facts about the subjective views of these institutions on the risk and risk premia of 15 asset classes. First, the subjective distribution of asset class returns is well described by a 1-factor structure, with this single risk factor explaining around 67% of the subjective variability in asset class returns for the typical institution. Second, more than 80% of the variability in subjective risk premia is due to variability in subjective risk compensation as opposed to subjective mispricing. And third, subjective risk and risk premia vary much more across asset classes than across institutions. Our findings jointly imply that a model with institutions that have homogeneous beliefs while perceiving a risk-return tradeoff describes the data better than a model with institutions that have heterogeneous
beliefs while ignoring risk-return tradeoffs.