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Changing Risk Premia: Evidence from a Small Open Economy

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  • Björn Hansson
  • Peter Hördahl

Abstract

Little is known about the differences in the relation between risk and return in large economies such as the U.S. compared with smaller, less studied, markets. In this paper, Sweden serves as a representative for small open economies. The price of risk on the Swedish stock market is estimated using a conditional asset pricing model that allows for time variation in the risk. Four different GARCH‐M models are used in the econometric specification. The estimates of the price of risk are invariably positive and significant, and we conclude that there exists a time‐varying risk premium in the Swedish stock market. Our results show that there are small differences in the preferences towards risk of representative investors in small and large economies.

Suggested Citation

  • Björn Hansson & Peter Hördahl, 1997. "Changing Risk Premia: Evidence from a Small Open Economy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(2), pages 335-350, June.
    • Handle: RePEc:bla:scandj:v:99:y:1997:i:2:p:335-350
    DOI: 10.1111/1467-9442.00066
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    Cited by:

    1. Nick Samouilhan, 2006. "The Price of Risk on the JSE," Working Papers 049, Economic Research Southern Africa.
    2. Stilianos Fountas & Menelaos Karanasos & Marika Karanassou, "undated". "A GARCH Model of Inflation and Inflation Uncertainty with Simultaneous Feedback," Discussion Papers 00/24, Department of Economics, University of York.
    3. Bjorn Hansson & Peter Hordahl, 1998. "Testing the conditional CAPM using multivariate GARCH-M," Applied Financial Economics, Taylor & Francis Journals, vol. 8(4), pages 377-388.
    4. Stilianos Fountas & Menelaos Karanasos & Marika Karanassou, "undated". "A GARCH Model of Inflation and Inflation Uncertainty with Simultaneous Feedback," Discussion Papers 00/24, Department of Economics, University of York.
    5. Menelaos Karanasos & J. Kim, "undated". "Alternative GARCH in Mean Models: An Application to the Korean Stock Market," Discussion Papers 00/25, Department of Economics, University of York.

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