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The Short-Term Risk Premium Puzzle: Revisited by Dynamic Herd Behavior (in Korean)

Author

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  • Beum-Jo Park

    (Department of Economics, Dankook University)

Abstract

This paper perceives that the insignificant evidence of a positive risk-return relation(risk premium) for the short term is attributed primarily to dynamic herd behavior, which works as short-term noise, introduces a new method of measuring dynamic herd behavior, and extends the GARCH-M type model to account for dynamic herding and its effect on the relationship between returns and volatility as a proxy of risk. Applying the GJR-GARCH-M-Herding model to the daily KOSPI and NASDAQ stock data, we find a significant positive relationship in contrast to the results of the standard GJR-GARCH-M model and conclude that the short-term risk premium could be rendered ambiguous by dynamic herding that reflects short-term noises.

Suggested Citation

  • Beum-Jo Park, 2014. "The Short-Term Risk Premium Puzzle: Revisited by Dynamic Herd Behavior (in Korean)," Economic Analysis (Quarterly), Economic Research Institute, Bank of Korea, vol. 20(2), pages 1-26, June.
    • Handle: RePEc:bok:journl:v:20:y:2014:i:2:p:1-26
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    More about this item

    Keywords

    Risk Premium Puzzle; Dynamic Herd Behavior; Volatility; Time-varying Herding Parameter; GARCH-M-Herding Models;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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