Equity market volatility and expected risk premium
Long Chen (),
Hui Guo () and
Lu Zhang ()
No 2006-007, Working Papers from Federal Reserve Bank of St. Louis
This paper revisits the time-series relation between the conditional risk premium and variance of the equity market portfolio. The main innovation is that we construct a measure of the ex ante equity market risk premium using corporate bond yield spread data. This measure is forward-looking and does not rely critically on either realized equity returns or instrumental variables. We find strong support for a positive risk-return tradeoff, and this result is not sensitive to a number of robustness checks, including alternative proxies of the conditional stock variance and controls for hedging demands.
Keywords: Stock exchanges; Securities (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-ets, nep-fin, nep-fmk and nep-rmg
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