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Recovering the market risk premium from higher‐order moment risks

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  • George Chalamandaris
  • Leonidas S. Rompolis

Abstract

We propose a consistent approach for the estimation of the market risk premium. As a first step, we define the broadest possible set of ex ante estimators from the viewpoint of a power utility optimiser holding the market portfolio. We then employ an evaluation framework to optimise the parametrisation of the methodology. We show that this theoretical framework can still produce reasonable market risk premium estimates, even when the representative agent is not a power utility optimiser. Our results show that the inclusion of higher‐order moment risk premia improves the accuracy of the method.

Suggested Citation

  • George Chalamandaris & Leonidas S. Rompolis, 2021. "Recovering the market risk premium from higher‐order moment risks," European Financial Management, European Financial Management Association, vol. 27(1), pages 147-186, January.
    • Handle: RePEc:bla:eufman:v:27:y:2021:i:1:p:147-186
    DOI: 10.1111/eufm.12287
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