Econometrics

Consumption-based capital asset pricing model

Investment theory

Economics

Physics

Rational pricing

Risk premium

Astrophysics

Systematic risk

Computer science

Financial economics

Variation (astronomy)

Portfolio

Sharpe ratio

Arbitrage pricing theory

Actuarial science

Capital asset pricing model

Asset (computer security)

Computer security

Review of Financial Studies

Equal compensation across assets for the same risk exposures is a bedrock of asset pricing theory and empirics. Yet real-world frictions can violate this equality and create apparently high Sharpe ratio opportunities. We develop new methods for asset pricing with cross-sectional heterogeneity in compensation for risk. We extend k-means clustering to group assets by risk prices and introduce a formal test for whether differences in risk premiums across market segments are too large to occur by chance. We find significant evidence of cross-sectional variation in risk prices for almost all combinations of test assets, factor models, and time periods considered.

Risk Price Variation: The Missing Half of Empirical Asset Pricing