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
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: Suggested Citation
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