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The intertemporal capital asset pricing model with dynamic conditional correlations

  • Bali, Turan G.
  • Engle, Robert F.

The intertemporal capital asset pricing model of Merton (1973) is examined using the dynamic conditional correlation (DCC) model of Engle (2002). The mean-reverting DCC model is used to estimate a stock's (portfolio's) conditional covariance with the market and test whether the conditional covariance predicts time-variation in the stock's (portfolio's) expected return. The risk-aversion coefficient, restricted to be the same across assets in panel regression, is estimated to be between two and four and highly significant. The risk premium induced by the conditional covariation of assets with the market portfolio remains positive and significant after controlling for risk premia induced by conditional covariation with macroeconomic, financial, and volatility factors.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 57 (2010)
Issue (Month): 4 (May)
Pages: 377-390

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Handle: RePEc:eee:moneco:v:57:y:2010:i:4:p:377-390
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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