Theoretical Relations Between Risk Premiums and Conditional Variances
AbstractMany statistical models of time-varying risk premiums, including the autoregressive conditional heteroskedasticity-in-mean, attempt to exploit a relation between risk premiums and conditional variances or covariances of asset returns. The authors examine this relation in numerical versions of a dynamic asset-pricing theory and show that it can be increasing, decreasing, flat, or nonmonotonic. Its shape depends on both the preferences of the representative agent and the stochastic structure of the economy. Without additional structure, the theory does not provide either a general foundation for autoregressive conditional heteroskedasticity-in-mean specifications or a simple interpretation of their parameters.
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Bibliographic InfoPaper provided by New York University, Leonard N. Stern School of Business, Department of Economics in its series Working Papers with number 92-18a.
Date of creation: Apr 1992
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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
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Web page: http://w4.stern.nyu.edu/economics/
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Other versions of this item:
- Backus, David K & Gregory, Allan W, 1993. "Theoretical Relations between Risk Premiums and Conditional Variances," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(2), pages 177-85, April.
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