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The shape of the risk premium: evidence from a semiparametric GARCH model

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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.

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en

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application/pdf

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http://eprints.lse.ac.uk/24769/1/dp514.pdf

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