Long-run risk-return trade-offs

Federico M. Bandi and Benoit Perron ()

Journal of Econometrics, 2008, vol. 143, issue 2, 349-374

Abstract: Excess market returns are correlated with past market variance. This dependence is statistically mild at short horizons (thereby leading to a hard-to-detect risk-return trade-off, as in the existing literature) but increases with the horizon and is strong in the long run (i.e., between 6 and 10 years). From an econometric standpoint, we find that the long-run predictive power of past market variance is robust to the statistical properties of long-horizon stock-return predictive regressions. From an economic standpoint, we show that, when conditioning on past market variance, conditional versions of the traditional CAPM and consumption-CAPM yield considerably smaller cross-sectional pricing errors than their unconditional counterparts.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:143:y:2008:i:2:p:349-374

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