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Generalized Risk Premia

Paul Schneider ()

No 14-29, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper develops an optimal trading strategy explicitly linked to an agent's preferences and assessment of the distribution of asset returns. The price of this strategy is a portfolio of implied moments, and its expected excess returns naturally accommodate compensation for higher-order moment risk. Variance risk and the equity premium approximate it to first order and it nests cross-sectional asset pricing models such as the CAPM. An empirical study in the US index market compares the investment behavior of an agent with recursive long-run risk preferences to one who merely uses an i.i.d. time series model and takes market prices as given. The two agents exhibit very similar behavior during crises and can be distinguished mostly during calm periods.

Keywords: Predictability; pricing kernel; model risk; trading strategy; model-free; variance premium; skew premium; kurtosispremium OR from SSRN: Preference trading; pricing kernel; model risk; trading strategy; model-free; variance premium; equity premium; skew premium; kurtosis premium (search for similar items in EconPapers)
JEL-codes: C02 C23 C52 C61 G11 G12 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2014-07
New Economics Papers: this item is included in nep-fmk, nep-ore, nep-rmg and nep-upt
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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http://ssrn.com/abstract=2188349 (application/pdf)

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Journal Article: Generalized risk premia (2015) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1429

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