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Time-Varying Risk Premium In Large Cross-Sectional Equidity Datasets

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  • Patrick GAGLIARDINI

    (University of Lugano and Swiss Finance Institute)

  • Elisa OSSOLA

    (University of Lugano)

  • Olivier SCAILLET

    (University of Geneva and Swiss Finance Institute)

Abstract

We develop an econometric methodology to infer the path of risk premia from large unbalanced panel of individual stock returns. We estimate the time-varying risk premia implied by conditional linear asset pricing models where the conditioning includes instruments common to all assets and asset specific instruments. The estimator uses simple weighted two-pass cross-sectional regressions, and we show its consistency and asymptotic normality under increasing cross-sectional and time series dimensions. We address consistent estimation of the asymptotic variance, and testing for asset pricing restrictions induced by the no-arbitrage assumption in large economies. The empirical illustration on returns for about ten thousands US stocks from July 1964 to December 2009 shows that conditional risk premia are large and volatile in crisis periods. They exhibit large positive and negative strays from standard unconditional estimates and follow the macroeconomic cycles. The asset pricing restrictions are rejected for the usual unconditional four-factor model capturing market, size, value and momentum effects.

Suggested Citation

  • Patrick GAGLIARDINI & Elisa OSSOLA & Olivier SCAILLET, 2011. "Time-Varying Risk Premium In Large Cross-Sectional Equidity Datasets," Swiss Finance Institute Research Paper Series 11-41, Swiss Finance Institute.
  • Handle: RePEc:chf:rpseri:rp1141
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    More about this item

    Keywords

    large panel; factor model; risk premium; asset pricing;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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