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Understanding Short†versus Long†Run Risk Premia

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  • Andrea Buraschi
  • Andrea Carnelli

Abstract

This paper studies the link between short†and long†run risk premia. We extract short†term risk premia from contemporaneous information on short†term futures and cash equity markets under the assumption of no arbitrage. Predictability regressions reveal that short†term risk premia capture different information from long†run risk premia. Counter to the intuition that a high price of risk commands high returns, high short†run risk premia on dividend claims predict low returns on the index. While inconsistent with models featuring either habit persistence or long†run risk, the results may be reconciled with some models of uncertainty aversion.

Suggested Citation

  • Andrea Buraschi & Andrea Carnelli, 2014. "Understanding Short†versus Long†Run Risk Premia," European Financial Management, European Financial Management Association, vol. 20(4), pages 714-738, September.
    • Handle: RePEc:bla:eufman:v:20:y:2014:i:4:p:714-738
    DOI: 10.1111/j.1468-036X.2013.12027.x
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    References listed on IDEAS

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    Cited by:

    1. Óscar Arce & Sergio Mayordomo, 2016. "The Impact of the 2011 Short†Sale Ban on Financial Stability: Evidence from the Spanish Stock Market," European Financial Management, European Financial Management Association, vol. 22(5), pages 1001-1022, November.

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