Exponential-type GARCH models with linear-in-variance risk premium

Christian Hafner and Dimitra, Kyriakopoulou ()
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Dimitra, Kyriakopoulou: Université catholique de Louvain, CORE, Belgium

No 2019013, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: One of the implications of the intertemporal capital asset pricing model (CAPM) is that the risk premium of the market portfolio is a linear function of its variance. Yet, estimation theory of classical GARCH-in-mean models with linear-in-variance risk premium requires strong assumptions and is incomplete. We show that exponential-type GARCH models such as EGARCH or Log-GARCH are more natural in dealing with linear-in-variance risk premia. For the popular and more difficult case of EGARCH-in-mean, we derive conditions for the existence of a unique stationary and ergodic solution and invertibility following a stochastic recurrence equation approach. We then show consistency and asymptotic normality of the quasi maximum likelihood estimator under weak moment assumptions. An empirical application estimates the dynamic risk premia of a variety of stock indices using both EGARCH-M and Log-GARCH-M models.

Keywords: GARC H-in-Mean; EGARCH; Log-GARCH; CAPM; risk premium; maximum likelihood; stochastic recurrence equation (search for similar items in EconPapers)
JEL-codes: C71 C78 (search for similar items in EconPapers)
Date: 2019-07-10
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-ore and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Exponential-Type GARCH Models With Linear-in-Variance Risk Premium (2021)
Working Paper: Exponential-Type GARCH Models With Linear-in-Variance Risk Premium (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:cor:louvco:2019013

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