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The Shape of the Risk Premium: Evidence from a Semiparametric GARCH Model

Benoit Perron () and Oliver Linton ()

FMG Discussion Papers from Financial Markets Group

Abstract: We examine the relationship between the risk premium on the S&P500 index total return and its conditional variance. We propose a new semiparametric model in which the conditional variance process is parametric, while the conditional mean is an arbitrary function of the conditional variance. For monthly S&P 500 excess returns, the relationship between the two moments that we uncover is nonlinear and nonmonotonic. Moreover, we find considerable persistence in the conditional variance as well as a leverage effect as documented by others.

Date: 2004-09
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Related works:
Working Paper: The shape of the risk premium: evidence from a semiparametric GARCH model (2000) Downloads
Working Paper: The Shape of the Risk Premium: Evidence from a Semiparametric Garch Model (1999) Downloads
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