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On the Impacts of Crisis on the Risk Premium: Evidence from the US Stock Market using a Conditional CAPM

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Author Info

  • Arouri Mohamed El Hédi

    ()
    (EDHEC Business School)

  • Jawadi Fredj

    ()
    (Amiens School of Management, LEO Université d''Orléans)

Abstract

This article investigates the evolution of the US risk premium in periods of crisis. First, we estimate a conditional CAPM with time-varying systematic risk and price of risk using a multivariate GARCH-in-Mean model. Second, we study the structural breaks in the risk premium we obtain. Finally, we relate our results to important facts and economic events. Our findings show that the US risk premium increased significantly during periods of crisis and that the last 2007-2009 financial crisis has had the largest impact.

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File URL: http://www.accessecon.com/Pubs/EB/2010/Volume30/EB-10-V30-I2-P97.pdf
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Bibliographic Info

Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 30 (2010)
Issue (Month): 2 ()
Pages: 1032-1043

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Handle: RePEc:ebl:ecbull:eb-09-00810

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Keywords: US Risk Premium; CAPM; Multivariate GARCH; Structural Breaks;

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References

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  1. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
  2. Mohamed El Hedi Arouri & Julien Fouquau, 2009. "On the short-term influence of oil price changes on stock markets in GCC countries: linear and nonlinear analyses," Working Papers hal-00387103, HAL.
  3. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
  4. Atif Mian & Amir Sufi, 2008. "The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis," NBER Working Papers 13936, National Bureau of Economic Research, Inc.
  5. Arouri Mohamed el hédi & Jamel Jouini, 2009. "Analysis of structural breaks in the stock market integration of mexico into world," Economics Bulletin, AccessEcon, vol. 29(2), pages 1380-1392.
  6. Harvey, Campbell R, 1991. " The World Price of Covariance Risk," Journal of Finance, American Finance Association, vol. 46(1), pages 111-57, March.
  7. Gerard, Bruno & Thanyalakpark, Kessara & Batten, Jonathan A., 2003. "Are the East Asian markets integrated? Evidence from the ICAPM," Journal of Economics and Business, Elsevier, vol. 55(5-6), pages 585-607.
  8. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison," NBER Working Papers 13761, National Bureau of Economic Research, Inc.
  9. Carrieri, Francesca & Errunza, Vihang & Hogan, Ked, 2007. "Characterizing World Market Integration through Time," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(04), pages 915-940, December.
  10. De Santis, Giorgio & Gerard, Bruno & Hillion, Pierre, 2003. "The relevance of currency risk in the EMU," Journal of Economics and Business, Elsevier, vol. 55(5-6), pages 427-462.
  11. Fredj Jawadi, 2010. "Financial crises, bank losses, risk management and audit: what happened?," Applied Economics Letters, Taylor & Francis Journals, vol. 17(10), pages 1019-1022.
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Cited by:
  1. Dimitrios Dimitriou & Theodore Simos, 2013. "International portfolio diversification: an ICAPM approach with currency risk," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 6(2), pages 177-189, September.
  2. Vit Posta, 2012. "Time-Varying Risk Premium in the Czech Capital Market: Did the Market Experience a Structural Shock in 2008–2009?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 62(5), pages 450-470, November.

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