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Countercyclical and time-varying reward to risk and the equity premium

Author

Listed:
  • Antell, Jan
  • Vaihekoski, Mika

Abstract

We study whether the equity premium is related to volatility or variance, whether the reward to market risk is positive, and whether it behaves in a counter-cyclical fashion. Using APARCH models for the conditional market risk, we compare the traditional and the new testing approach of Antell and Vaihekoski (2019) on the monthly US equity premium from 1928 to 2018. The results from the new approach give stronger support for the pricing of volatility rather than variance and for positive reward to market risk. The support for timevarying and countercyclical reward to risk coefficient is smaller than previously thought.

Suggested Citation

  • Antell, Jan & Vaihekoski, Mika, 2023. "Countercyclical and time-varying reward to risk and the equity premium," Research in International Business and Finance, Elsevier, vol. 66(C).
    • Handle: RePEc:eee:riibaf:v:66:y:2023:i:c:s0275531923001435
    DOI: 10.1016/j.ribaf.2023.102017
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    References listed on IDEAS

    as
    1. Hui Guo & Zijun Wang & Jian Yang, 2013. "Time‐Varying Risk–Return Trade‐off in the Stock Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(4), pages 623-650, June.
    2. Matthieu Gilson & Kim Oosterlinck & Andrey Ukhov, 2015. "Time-Varying Risk Aversion during World War II: Evidence from Belgian Lottery Bond Prices," Working Papers CEB 15-031, ULB -- Universite Libre de Bruxelles.
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    More about this item

    Keywords

    Conditional asset pricing; Equity premium; Reward to risk; Market risk; Business cycles;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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