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The intertemporal capital asset pricing model with dynamic conditional correlations

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  • Bali, Turan G.
  • Engle, Robert F.

Abstract

The intertemporal capital asset pricing model of Merton (1973) is examined using the dynamic conditional correlation (DCC) model of Engle (2002). The mean-reverting DCC model is used to estimate a stock's (portfolio's) conditional covariance with the market and test whether the conditional covariance predicts time-variation in the stock's (portfolio's) expected return. The risk-aversion coefficient, restricted to be the same across assets in panel regression, is estimated to be between two and four and highly significant. The risk premium induced by the conditional covariation of assets with the market portfolio remains positive and significant after controlling for risk premia induced by conditional covariation with macroeconomic, financial, and volatility factors.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 57 (2010)
Issue (Month): 4 (May)
Pages: 377-390

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Handle: RePEc:eee:moneco:v:57:y:2010:i:4:p:377-390

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Web page: http://www.elsevier.com/locate/inca/505566

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Keywords: ICAPM Dynamic conditional correlation ARCH Risk aversion Risk factors;

References

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Cited by:
  1. Till Strohsal & Enzo Weber, 2012. "The Signal of Volatility," SFB 649 Discussion Papers SFB649DP2012-043, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  2. Bakshi, Gurdip & Panayotov, George, 2013. "Predictability of currency carry trades and asset pricing implications," Journal of Financial Economics, Elsevier, vol. 110(1), pages 139-163.
  3. Maio, Paulo & Santa-Clara, Pedro, 2012. "Multifactor models and their consistency with the ICAPM," Journal of Financial Economics, Elsevier, vol. 106(3), pages 586-613.
  4. Esben Hedegaard & Robert J. Hodrick, 2014. "Measuring the Risk-Return Tradeoff with Time-Varying Conditional Covariances," NBER Working Papers 20245, National Bureau of Economic Research, Inc.
  5. Julien Chevallier & Benoit Sevi, 2014. "A fear index to predict oil futures returns," Working Papers 2014-333, Department of Research, Ipag Business School.
  6. Bali, Turan G. & Brown, Stephen J. & Caglayan, Mustafa Onur, 2011. "Do hedge funds' exposures to risk factors predict their future returns?," Journal of Financial Economics, Elsevier, vol. 101(1), pages 36-68, July.
  7. Turan G. Bali & Robert F. Engle & Yi Tang, 2013. "Dynamic Conditional Beta is Alive and Well in the Cross-Section of Daily Stock Returns," Koç University-TUSIAD Economic Research Forum Working Papers 1305, Koc University-TUSIAD Economic Research Forum.
  8. Maio, Paulo, 2013. "Return decomposition and the Intertemporal CAPM," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4958-4972.
  9. Éric Jacquier & Cédric Okou, 2013. "Disentangling Continuous Volatility from Jumps in Long-Run Risk-Return Relationships," CIRANO Working Papers 2013s-14, CIRANO.
  10. Esben Hedegaard & Robert J. Hodrick, 2014. "Estimating the Risk-Return Trade-off with Overlapping Data Inference," NBER Working Papers 19969, National Bureau of Economic Research, Inc.
  11. Kevin Sheppard, 2014. "Factor High-Frequency Based Volatility (HEAVY) Models," Economics Series Working Papers 710, University of Oxford, Department of Economics.
  12. Juho Kanniainen & Robert Pich\'e, 2012. "Stock Price Dynamics and Option Valuations under Volatility Feedback Effect," Papers 1209.4718, arXiv.org.
  13. Strohsal, Till & Weber, Enzo, 2013. "Identifying Volatility Signals from Time-Varying Simultaneous Stock Market Interaction," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79903, Verein für Socialpolitik / German Economic Association.
  14. Fernandez-Perez, Adrian & Fernández-Rodríguez, Fernando & Sosvilla-Rivero, Simón, 2014. "The term structure of interest rates as predictor of stock returns: Evidence for the IBEX 35 during a bear market," International Review of Economics & Finance, Elsevier, vol. 31(C), pages 21-33.
  15. Amélie Charles & Olivier Darné & Zakaria Moussa, 2014. "The sensitivity of Fama-French factors to economic uncertainty," Working Papers hal-01015702, HAL.
  16. Kanniainen, Juho & Piché, Robert, 2013. "Stock price dynamics and option valuations under volatility feedback effect," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(4), pages 722-740.

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