New Economics Papers
on Financial Markets
Issue of 2007‒07‒13
one paper chosen by

  1. Robustness of the Risk-Return Relationship in the U.S. Stock Market By Lanne, Markku; Luoto, Jani

  1. By: Lanne, Markku; Luoto, Jani
    Abstract: In this paper, we study the risk-return relationship in monthly U.S. stock returns (1928:1— 2004:12) using GARCH-in-Mean models. In particular, we consider the robustness of the relationship with respect to the omission of the intercept term in the equation for the expected excess return recently recommended by Lanne and Saikkonen (2006). The existence of the relationship is quite robust, but its estimated strength is dependent on the prior belief concerning the intercept. This is the case in particular in the first half of the sample period, where also the coefficient of the relative risk aversion is found to be smaller and the equity premium greater than in the latter half.
    Keywords: ICAPM model; relative risk aversion; GARCH-in-Mean model; Bayesian analysis
    JEL: G12 C22 C11
    Date: 2007

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