Time-varying risk premia
AbstractTime-varying risk premia (TVRP) is one of the four sources of stock return autocorrelation. TVRP arises in a securities market equilibrium when the equilibrium expected returns of the available investments vary over time; in particular, the presence of TVRP does not indicate pricing inefficiency. This paper provides equilibrium upper bounds on TVRP, as a function of the return period, the time horizon over which the autocorrelations are calculated, and the variability of risk premia. These bounds on TVRP, in combination with the methods of Anderson et al. (2010), allow one to establish lower bounds on the contribution of partial price adjustment, and thus pricing inefficiency, to stock return autocorrelation.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Mathematical Economics.
Volume (Year): 47 (2011)
Issue (Month): 3 ()
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Time-varying risk premia; Stock return autocorrelation; Efficient markets hypothesis;
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