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Expected Returns, Time-Varying Risk and Risk Premia

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  • Martin D. Evans

Abstract

A new empirical model for intertemporal capital asset pricing is presented that allows both time-varying risk premia and betas where the latter are identified from the dynamics of the conditional covariance of returns. The model is more successful in explaining the predictable variations in excess returns when the returns on the stock market and corporate bonds are included as risk factors than when the stock market is the single factor. Although changes in the covariance of returns induce variations in the betas, most of the predictable movements in returns are attributed to changes in the risk premia. Copyright 1994 by American Finance Association.

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Bibliographic Info

Paper provided by New York University, Leonard N. Stern School of Business, Department of Economics in its series Working Papers with number 92-14.

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Date of creation: Mar 1992
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Handle: RePEc:ste:nystbu:92-14

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Postal: New York University, Leonard N. Stern School of Business, Department of Economics, 44 West 4th Street, New York, NY 10012-1126
Phone: (212) 998-0860
Fax: (212) 995-4218
Web page: http://w4.stern.nyu.edu/economics/
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Cited by:
  1. Eckbo, B Espen & Norli, Øyvind, 2005. "Liquidity Risk, Leverage and Long-Run IPO Returns," CEPR Discussion Papers 4832, C.E.P.R. Discussion Papers.
  2. Bruce Niendorf & Thomas Ottaway, 2002. "Wealth effects of time variation in investor risk preferences," Journal of Economics and Finance, Springer, vol. 26(1), pages 77-87, March.
  3. Eckbo, B. Espen & Norli, Øyvind, 2004. "The choice of seasoned-equity selling mechanism: Theory and evidence," Discussion Papers 2004/17, Department of Business and Management Science, Norwegian School of Economics.
  4. Min-Hsien Chiang & Long-Jainn Hwang & Yui-Chi Wu, 2004. "Insider Trading Performance in the Taiwan Stock Market," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 3(3), pages 239-256, December.
  5. B. Carmichael & L. Samson, 2003. "Expected returns and economic risk in Canadian financial markets," Applied Financial Economics, Taylor & Francis Journals, vol. 13(3), pages 177-189.
  6. Ram Bhar & Carl Chiarella & Wolfgang Runggaldier, 2001. "Filtering Equity Risk Premia From Derivative Prices," Research Paper Series 69, Quantitative Finance Research Centre, University of Technology, Sydney.
  7. Tano Santos & Pietro Veronesi, 2004. "Conditional Betas," NBER Working Papers 10413, National Bureau of Economic Research, Inc.
  8. Manuel Ammann & Michael Verhofen, 2006. "The Effect of Market Regimes on Style Allocation," Financial Markets and Portfolio Management, Springer, vol. 20(3), pages 309-337, September.
  9. Wayne E. Ferson & Ravi Jagannathan, 1996. "Econometric evaluation of asset pricing models," Staff Report 206, Federal Reserve Bank of Minneapolis.
  10. Viviana Fernández, 2001. "A Liquidity Premium Puzzle?: Evidence from Chile," Documentos de Trabajo 105, Centro de Economía Aplicada, Universidad de Chile.
  11. Ram Bhar & Carl Chiarella, 2000. "Infering Forward Looking Financial Market Risk Premia from Derivatives Prices," Research Paper Series 42, Quantitative Finance Research Centre, University of Technology, Sydney.

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