How to profit from mean reverting risk premiums? Implications for stock selection

Olaf Stotz

Journal of Asset Management, 2004, vol. 5, issue 3, No 5, 192-202

Abstract: Abstract This paper investigates the behaviour of risk premiums of European stocks. It is found that risk premiums deviate significantly from their equilibrium level. Over time, however, they revert to their equilibrium level. This reversion can be exploited in an active stock selection strategy. Compared with a passive investment, such a strategy yields a risk adjusted excess return of more than 8 per cent p.a. for a medium level of risk (ie 6 per cent tracking error).

Keywords: risk premium; mean reversion; market efficiency; active portfolio management (search for similar items in EconPapers)
Date: 2004
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DOI: 10.1057/palgrave.jam.2240138

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