The Risk-Return Tradeoff and Leverage Effect in a Stochastic Volatility-in-Mean Model
We study the risk premium and leverage effect in the S&P500 market using the stochastic volatility-in-mean model of Barndor¤-Nielsen & Shephard (2001). The Merton (1973, 1980) equilibrium asset pricing condition linking the conditional mean and conditional variance of discrete time returns is reinterpreted in terms of the continuous time model. Tests are performed on the risk-return relation, the leverage effect, and the overidentifying zero intercept restriction in the Merton condition. Results are compared across alternative volatility proxies, in particular, realized volatility from high-frequency (5-minute) returns, implied Black-Scholes volatility backed out from observed option prices, model-free implied volatility (VIX), and staggered bipower variation. Our results are consistent with a positive risk-return relation and a significant leverage effect, whereas an additional overidentifying zero intercept condition is rejected. We also show that these inferences are sensitive to the exact timing of the chosen olatility proxy. Robustness of the conclusions is verified in bootstrap experiments.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Muller, Ulrich A. & Dacorogna, Michel M. & Olsen, Richard B. & Pictet, Olivier V. & Schwarz, Matthias & Morgenegg, Claude, 1990. "Statistical study of foreign exchange rates, empirical evidence of a price change scaling law, and intraday analysis," Journal of Banking & Finance, Elsevier, vol. 14(6), pages 1189-1208, December.
When requesting a correction, please mention this item's handle: RePEc:aah:create:2010-50. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.