We examine the relationship between the risk premium on the S&P 500 index return and its conditional variance. We use the SMEGARCH - Semiparametric-Mean EGARCH - model in which the conditional variance process is EGARCH 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. Moreover, the shape of these relationships seems to be relatively stable over time.
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Paper provided by Universite de Montreal, Departement de sciences economiques in its series Cahiers de recherche with number
9911.
Find related papers by JEL classification: C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
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