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Volatility spillovers and the price of risk: Evidence from the Swiss stock market

Author

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  • Christian Jochum

    (Department of Economics , University of St. Gallen, Dufourstr. 48, CH-9000 St. Gallen, Switzerland)

Abstract

This paper investigates the behavior of the risk premium on the Swiss stock market. The risk premium consists of two components, which are estimated separately: the amount of volatility and the unit price of risk. By estimating a bivariate GARCH-M model the volatility of the Swiss market is found to be strongly exposed to spillovers from the other major financial markets. To estimate the unit price of risk a Kalman filter procedure is employed, which allows for variability in this variable. Investors place a high price on risk, when the market is considered `expensive'.

Suggested Citation

  • Christian Jochum, 1999. "Volatility spillovers and the price of risk: Evidence from the Swiss stock market," Empirical Economics, Springer, vol. 24(2), pages 303-322.
    • Handle: RePEc:spr:empeco:v:24:y:1999:i:2:p:303-322
    Note: received: March 1998/final version received: July 1998
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    Citations

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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. Paulo Ferreira, 2020. "Dynamic long-range dependences in the Swiss stock market," Empirical Economics, Springer, vol. 58(4), pages 1541-1573, April.
    3. Antonios Antoniou & Emilios Galariotis & Spyros Spyrou, 2006. "The effect of time-varying risk on the profitability of contrarian investment strategies in a thinly traded market: a Kalman filter approach," Applied Financial Economics, Taylor & Francis Journals, vol. 16(18), pages 1317-1329.
    4. Bhar, Ramaprasad & Hamori, Shigeyuki, 2007. "Co-movement in the price of risk of aggregate equity markets," Economic Systems, Elsevier, vol. 31(3), pages 256-271, September.
    5. Ramaprasad Bhar, 2010. "Stochastic Filtering with Applications in Finance," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 7736, September.
    6. Tillmann, Peter, 2005. "Private sector involvement in the resolution of financial crises: How do markets react?," Journal of Development Economics, Elsevier, vol. 78(1), pages 114-132, October.
    7. Bhar, Ramaprasad & Nikolova, Biljana, 2013. "Measuring the interconnectedness of financial institutions," Economic Systems, Elsevier, vol. 37(1), pages 17-29.
    8. Bernard Ben Sita, 2013. "Volatility links between US industries," Applied Financial Economics, Taylor & Francis Journals, vol. 23(15), pages 1273-1286, August.
    9. Mahfuzul Haque & Imen Kouki, 2009. "Effect of 9/11 on the conditional time-varying equity risk premium: evidence from developed markets," Journal of Risk Finance, Emerald Group Publishing, vol. 10(3), pages 261-276, May.
    10. Bhar Ramaprasad & Chiarella Carl & Runggaldier Wolfgang J., 2004. "Inferring the Forward Looking Equity Risk Premium from Derivative Prices," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 8(1), pages 1-26, March.
    11. Galin Todorov & Prasad Bidarkota, 2014. "Time-varying financial spillovers from the US to frontier markets," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 7(2), pages 246-283, September.

    More about this item

    Keywords

    Volatility spillovers · risk premium · Kalman filter;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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