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

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 Va...

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Bibliographic Details
Published in:Research in international business and finance 2023-10, Vol.66, p.102017, Article 102017
Main Authors: Antell, Jan, Vaihekoski, Mika
Format: Article
Language:English
Subjects:
Business cycles
Conditional asset pricing
Equity premium
Market risk
Reward to risk
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Summary: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. [Display omitted] •Results support positive reward to market risk in equity premia.•Both volatility and variance of market returns are considered.•Stronger support for the pricing of volatility rather than variance.•Support for time-varying/countercyclical reward to risk is weaker than anticipated.
ISSN:0275-5319
DOI:10.1016/j.ribaf.2023.102017