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Time-varying risk premia

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  • Anderson, Robert M.

Abstract

Time-varying risk premia (TVRP) is one of the four sources of stock return autocorrelation. TVRP arises in a securities market equilibrium when the equilibrium expected returns of the available investments vary over time; in particular, the presence of TVRP does not indicate pricing inefficiency. This paper provides equilibrium upper bounds on TVRP, as a function of the return period, the time horizon over which the autocorrelations are calculated, and the variability of risk premia. These bounds on TVRP, in combination with the methods of Anderson et al. (2010), allow one to establish lower bounds on the contribution of partial price adjustment, and thus pricing inefficiency, to stock return autocorrelation.

Suggested Citation

  • Anderson, Robert M., 2011. "Time-varying risk premia," Journal of Mathematical Economics, Elsevier, vol. 47(3), pages 253-259.
  • Handle: RePEc:eee:mateco:v:47:y:2011:i:3:p:253-259
    DOI: 10.1016/j.jmateco.2010.12.010
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    Citations

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    Cited by:

    1. Kinnunen, Jyri, 2014. "Risk-return trade-off and serial correlation: Do volume and volatility matter?," Journal of Financial Markets, Elsevier, vol. 20(C), pages 1-19.
    2. Gębka, Bartosz & Wohar, Mark E., 2013. "The determinants of quantile autocorrelations: Evidence from the UK," International Review of Financial Analysis, Elsevier, vol. 29(C), pages 51-61.
    3. Anderson, Robert M. & Eom, Kyong Shik & Hahn, Sang Buhm & Park, Jong-Ho, 2013. "Autocorrelation and partial price adjustment," Journal of Empirical Finance, Elsevier, vol. 24(C), pages 78-93.
    4. Kinnunen, Jyri, 2017. "Dynamic cross-autocorrelation in stock returns," Journal of Empirical Finance, Elsevier, vol. 40(C), pages 162-173.

    More about this item

    Keywords

    Time-varying risk premia; Stock return autocorrelation; Efficient markets hypothesis;

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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