Stock Returns and Volatility: Pricing the Short-Run and Long-Run Components of Market Risk
47 Pages Posted: 21 Jul 2006
Date Written: July 2006
Abstract
We decompose the time series of equity market risk into short- and long-run volatility components. Both components have negative and highly significant prices of risk in the cross section of equity returns. A three-factor model with the market return and the two volatility components compares favorably to benchmark models. We show that the short-run component captures market skewness risk, while the long-run component captures business cycle risk. Furthermore, short-run volatility is the more important cross-sectional risk factor, even though its average risk premium is smaller than the premium of the long-run component.
Keywords: asset pricing, stochastic volatility, cross section of returns
JEL Classification: G10, G12
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
There is a Risk-Return Tradeoff after All
By Pedro Santa-clara, Eric Ghysels, ...
-
There is a Risk-Return Tradeoff after All
By Eric Ghysels, Pedro Santa-clara, ...
-
The Equity Premium and Structural Breaks
By Lubos Pastor and Robert F. Stambaugh
-
By Qiang Kang and Michael W. Brandt
-
A Markov Model of Heteroskedasticity, Risk, and Learning in the Stock Market
By Christopher M. Turner, Richard Startz, ...
-
Uncovering the Risk-Return Relation in the Stock Market
By Hui Guo and Robert Whitelaw