On the pricing of overnight market risk
Patrizia Perras and
Niklas Wagner
Additional contact information
Patrizia Perras: University of Passau
Empirical Economics, 2020, vol. 59, issue 3, No 11, 1307-1327
Abstract:
Abstract This paper addresses the relation between market risk and expected market returns under periodic trading breaks. We propose a model where asset prices are driven by a diffusive process that operates during the trading day and a separate process that captures overnight price changes. Our empirical analysis shows that both components are important in explaining the equity market risk premium. Trading breaks entail a lack of market functionality and liquidity, and our results reveal that investors ask for a premium to hold the market portfolio overnight. Considering additional state variables in the model, we find that uncertainty risk and illiquidity risk are both significantly priced as well.
Keywords: Dynamic asset pricing; Trading breaks; Equity premium; Diffusion premium; Overnight jump premium (search for similar items in EconPapers)
JEL-codes: C51 G12 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)
Downloads: (external link)
http://link.springer.com/10.1007/s00181-019-01714-4 Abstract (text/html)
Access to the full text of the articles in this series is restricted.
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:spr:empeco:v:59:y:2020:i:3:d:10.1007_s00181-019-01714-4
Ordering information: This journal article can be ordered from
http://www.springer. ... rics/journal/181/PS2
DOI: 10.1007/s00181-019-01714-4
Access Statistics for this article
Empirical Economics is currently edited by Robert M. Kunst, Arthur H.O. van Soest, Bertrand Candelon, Subal C. Kumbhakar and Joakim Westerlund
More articles in Empirical Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().