The Cross-Section of Risk-Taking and Asset Prices

The distribution of institutional investor risk-taking carries significant explanatory power for the cross-section of asset returns. We compute an investor-level Value-at-Risk (VaR) measure - our proxy for ex-ante riskiness - from a structural model with stochastic volatility that we estimate with a particle filter. Our pricing factor - CrossRisk - is then constructed from shocks to the procyclical dispersion of the time-varying VaR distribution. CrossRisk is able to price equity, bond, CDS, options, currency, and commodity market portfolios comparably to numerous single and multi-factor benchmarks. We show that the mechanism behind our results is the extensive margin - dynamic entry and exit of investors into the risky market. A synthetic highminus-low CrossRisk beta pre-sorted equity portfolio built on the full universe of CRSP firms has an annualized returns spread of 5.8%