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This article examines the cross sectional predictability of stock returns within the framework of time varying risk premia and asymmetric risk. In bad times, small, value and cyclical stocks are riskier than big, growth and noncyclical stocks, thereby explaining the value, size and cyclical premia. In contrast, in good times, value, big and noncyclical stocks generate higher average returns than do growth, small and cyclical stocks, despite the fact that they are not riskier. Furthermore, empirical tests of macroeconomic models highlight that average returns are commensurate with risk only in bad times. These results are robust to different measures of risk and different sets of test assets.
