The Shape of Risk Premium: Evidence from a Semiparametric GARCH Model

Universite de Montreal, C.R.D.E. Working Paper No. 0899

32 Pages Posted: 19 May 2001

See all articles by Oliver B. Linton

Oliver B. Linton

University of Cambridge

Benoit Perron

University of Montreal - Department of Economics; Center for Interuniversity Research and Analysis on Organization (CIRANO); University of Montreal - Center for Interuniversity Research in Econometrics

Date Written: September 24, 2000

Abstract

We examine the relationship between the risk premium on the S&P500 index total return and its conditional variance. We propose a new semiparametric model in which the conditional variance process is parametric, while the conditional mean is an arbitrary function of the condi-tional variance. For monthly S&P 500 excess returns, the relationship between the two moments that we uncover is nonlinear and nonmonotonic. Moreover, we find considerable persistence in the conditional variance as well as a leverage effect as documented by others.

Keywords: ARCH, asset pricing, backfitting, fourier series, kernel, risk premium

JEL Classification: C13, C14, G12

Suggested Citation

Linton, Oliver B. and Perron, Benoit, The Shape of Risk Premium: Evidence from a Semiparametric GARCH Model (September 24, 2000). Universite de Montreal, C.R.D.E. Working Paper No. 0899, Available at SSRN: https://ssrn.com/abstract=269627 or http://dx.doi.org/10.2139/ssrn.269627

Oliver B. Linton

University of Cambridge ( email )

Faculty of Economics
Cambridge, CB3 9DD
United Kingdom

Benoit Perron (Contact Author)

University of Montreal - Department of Economics ( email )

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Montreal, Quebec H3C 3J7
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Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

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University of Montreal - Center for Interuniversity Research in Econometrics ( email )

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