Abstract
This paper unifies macro-finance and multifactor asset pricing theories to show that, in sample and out of sample: (i) Larger cross-sectional book-to-market medians and spreads - price of risk proxies - predict larger market (in sample), size, value, and investment premiums; (ii) the investment and profitability spreads - risk (quantity) proxies - only forecast the investment and profitability premiums, respectively, especially when conditioned on the price of risk. This predictability generates factor timing strategies with substantial economic gains, supports the hypothesis of time-varying price of risk in macro-finance theories, and contradicts the hypothesis that the investment and profitability factors have constant risks.
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