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Equity market volatility and expected risk premium

Author

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  • Long Chen
  • Hui Guo
  • Lu Zhang

Abstract

This paper revisits the time-series relation between the conditional risk premium and variance of the equity market portfolio. The main innovation is that we construct a measure of the ex ante equity market risk premium using corporate bond yield spread data. This measure is forward-looking and does not rely critically on either realized equity returns or instrumental variables. We find strong support for a positive risk-return tradeoff, and this result is not sensitive to a number of robustness checks, including alternative proxies of the conditional stock variance and controls for hedging demands.

Suggested Citation

  • Long Chen & Hui Guo & Lu Zhang, 2006. "Equity market volatility and expected risk premium," Working Papers 2006-007, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2006-007
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    References listed on IDEAS

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    Cited by:

    1. Dötz, Niko, 2014. "Decomposition of country-specific corporate bond spreads," Discussion Papers 37/2014, Deutsche Bundesbank.
    2. Christian Gourieroux & Joann Jasiak, 2006. "A Degeneracy in the Analysis of Volatility and Covolatility Effects," Working Papers 2006-30, Center for Research in Economics and Statistics.

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