Effects of uncertainty and risk aversion on the exposure of investment-style factor returns to real activity

Abstract How do uncertainty and risk aversion affect the behavior of investment-style factors? We argue that a significant channel through which both uncertainty and risk aversion impact aggregate risk factors is the exposure of factor returns to real activity. We analyze this issue using mixed data sampling decomposition of the sensitivity of factor returns to real activity into high- and low-frequency components. We find a positive and significant relation between uncertainty and risk aversion for the low-frequency component of the sensitivity of factor returns to economic activity. More importantly, risk aversion significantly amplifies the effects of uncertainty on real activity exposure. The quality-based factor is an important exception to these findings.