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Exponential-Type GARCH Models With Linear-in-Variance Risk Premium

Author

Listed:
  • Hafner, Christian

    (Université catholique de Louvain, LIDAM/ISBA, Belgium)

  • Kyriakopoulou, Dimitra

    (Université catholique de Louvain, LIDAM/ISBA, Belgium)

Abstract

One of the implications of the intertemporal capital asset pricing model (CAPM) is that the risk premium of the market portfolio is a linear function of its variance. Yet, esti- mation theory of classical GARCH-in-mean models with linear-in-variance risk premium requires strong assumptions and is incomplete. We show that exponential-type GARCH models such as EGARCH or Log-GARCH are more natural in dealing with linear-in- variance risk premia. For the popular and more di¢ cult case of EGARCH-in-mean, we derive conditions for the existence of a unique stationary and ergodic solution and in- vertibility following a stochastic recurrence equation approach. We then show consistency and asymptotic normality of the quasi maximum likelihood estimator under weak moment assumptions. An empirical application estimates the dynamic risk premia of a variety of stock indices using both EGARCH-M and Log-GARCH-M models.

Suggested Citation

  • Hafner, Christian & Kyriakopoulou, Dimitra, 2020. "Exponential-Type GARCH Models With Linear-in-Variance Risk Premium," LIDAM Reprints ISBA 2020029, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    • Handle: RePEc:aiz:louvar:2020029
    DOI: https://doi.org/10.1080/07350015.2019.1691564
    Note: In: Journal of Business & Economic Statistics - Vol. To appear
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    Cited by:

    1. is not listed on IDEAS
    2. Antonis Demos, 2023. "Estimation of Asymmetric Stochastic Volatility in Mean Models," DEOS Working Papers 2309, Athens University of Economics and Business.
    3. Rewat Khanthaporn, 2022. "Analysis of Nonlinear Comovement of Benchmark Thai Government Bond Yields," PIER Discussion Papers 183, Puey Ungphakorn Institute for Economic Research.

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    Keywords

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    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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