Equity Premia and State-Dependent Risks
AbstractThis paper analyzes the empirical relations between equity premia and state-dependent consumption and market risks. These relations are derived from a flexible specification of the CCAPM with mixture distribution, which admits the existence of two regimes. Focusing on the market return, we find that the consumption and market risks are priced in each state, and the responses of expected equity premia to these risks are state dependent. Extending to various portfolio returns, we show that the responses to downside consumption risks are the most important, they are almost always statistically larger than the responses to upside consumption risks, and they are much larger for firms having smaller sizes and facing more financial distresses.
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Bibliographic InfoPaper provided by CIRPEE in its series Cahiers de recherche with number 1019.
Date of creation: 2010
Date of revision:
Mixture of truncated normals; downside and upside consumption and market risks;
Find related papers by JEL classification:
- C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-05-29 (All new papers)
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