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Robustness of the Risk-Return Relationship in the U.S. Stock Market

Markku Lanne and Jani Luoto

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper, we study the risk-return relationship in monthly U.S. stock returns (1928:1— 2004:12) using GARCH-in-Mean models. In particular, we consider the robustness of the relationship with respect to the omission of the intercept term in the equation for the expected excess return recently recommended by Lanne and Saikkonen (2006). The existence of the relationship is quite robust, but its estimated strength is dependent on the prior belief concerning the intercept. This is the case in particular in the first half of the sample period, where also the coefficient of the relative risk aversion is found to be smaller and the equity premium greater than in the latter half.

Keywords: ICAPM model; relative risk aversion; GARCH-in-Mean model; Bayesian analysis (search for similar items in EconPapers)
JEL-codes: C11 C22 G12 (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-fmk and nep-rmg
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Journal Article: Robustness of the risk-return relationship in the U.S. stock market (2008) Downloads
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