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On the Impacts of Crisis on the Risk Premium: Evidence from the US Stock Market using a Conditional CAPM

  • Mohamed El Hedi Arouri

    ()

    (EconomiX - CNRS : UMR7166 - Université de Paris X - Nanterre, LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans)

  • Fredj Jawadi

    (EconomiX - CNRS : UMR7166 - Université de Paris X - Nanterre, LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans)

This article investigates the evolution of the US risk premium in periods of crisis. First, we estimate a conditional CAPM with time-varying systematic risk and price of risk using a multivariate GARCH-in-Mean model. Second, we study the structural breaks in the US risk premium. Finally, we relate the obtained results to important facts and economic events. Our findings show that the US risk premium increased significantly during periods of crisis and that the last 2007-2009 financial crisis has had the largest impact.

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Paper provided by HAL in its series Working Papers with number hal-00507824.

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Date of creation: 01 Aug 2010
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Handle: RePEc:hal:wpaper:hal-00507824
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  1. Mohamed El Hedi Arouri & Julien Fouquau, 2009. "On the short-term influence of oil price changes on stock markets in GCC countries: linear and nonlinear analyses," Working Papers hal-00387103, HAL.
  2. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(3), pages 291-299, September.
  3. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
  4. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
  5. Harvey, Campbell R, 1991. " The World Price of Covariance Risk," Journal of Finance, American Finance Association, vol. 46(1), pages 111-57, March.
  6. Fredj Jawadi, 2010. "Financial crises, bank losses, risk management and audit: what happened?," Applied Economics Letters, Taylor & Francis Journals, vol. 17(10), pages 1019-1022.
  7. Gerard, Bruno & Thanyalakpark, Kessara & Batten, Jonathan A., 2003. "Are the East Asian markets integrated? Evidence from the ICAPM," Journal of Economics and Business, Elsevier, vol. 55(5-6), pages 585-607.
  8. Carrieri, Francesca & Errunza, Vihang & Hogan, Ked, 2007. "Characterizing World Market Integration through Time," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(04), pages 915-940, December.
  9. De Santis, Giorgio & Gerard, Bruno & Hillion, Pierre, 2003. "The relevance of currency risk in the EMU," Journal of Economics and Business, Elsevier, vol. 55(5-6), pages 427-462.
  10. Arouri Mohamed el hédi & Jamel Jouini, 2009. "Analysis of structural breaks in the stock market integration of mexico into world," Economics Bulletin, AccessEcon, vol. 29(2), pages 1380-1392.
  11. Atif Mian & Amir Sufi, 2008. "The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis," NBER Working Papers 13936, National Bureau of Economic Research, Inc.
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