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The shape of the risk premium: evidence from a semiparametric GARCH model

By Oliver Linton and Benoit Perron

Abstract

We examine the relationship between the risk premium on the S&P500 index total return and its conditional variance. We propose a new semiparametric model in which the conditional variance process is parametric, while the conditional mean is an arbitrary function of the conditional variance. For monthly S&P 500 excess returns, the relationship between the two moments that we uncover is nonlinear and nonmonotonic. Moreover, we find considerable persistence in the conditional variance as well as a leverage effect as documented by others

Topics: HB Economic Theory, HJ Public Finance
Publisher: Financial Markets Group, London School of Economics and Political Science
Year: 2000
OAI identifier: oai:eprints.lse.ac.uk:24769
Provided by: LSE Research Online

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