Time-Varying Risk Attitude and Conditional Skewness

Much literature finds that the skewness in the return distribution is negatively correlated with the risk premium coefficient, and speculation is the reason for the skewness in the return distribution. As further research, this paper, first taking up the time-varying property of the risk premium coefficient, proposes a GARCH-M model with a time-varying coefficient of the risk premium for an empirical study of the correlation between the conditional skewness in the return distribution and the time-varying risk attitude. The empirical study indicates that the coefficient of the risk premium varies with the time, and even in a mature market the conditional skewness in the return distribution is negatively correlated with the time-varying coefficient of the risk premium

Time-Varying Risk Attitude and Conditional Skewness

Much literature finds that the skewness in the return distribution is negatively correlated with the risk premium coefficient, and speculation is the reason for the skewness in the return distribution. As further research, this paper, first taking up the time-varying property of the risk premium coefficient, proposes a GARCH-M model with a time-varying coefficient of the risk premium for an empirical study of the correlation between the conditional skewness in the return distribution and the time-varying risk attitude. The empirical study indicates that the coefficient of the risk premium varies with the time, and even in a mature market the conditional skewness in the return distribution is negatively correlated with the time-varying coefficient of the risk premium

Test of Multi-moment Capital Asset Pricing Model: Evidence from Karachi Stock Exchange

This study examines the Capital Asset Pricing Model of Sharpe (1964) Lintner (1965) and Black (1972) as the benchmark model in the asset pricing theory. The empirical findings indicate that the Sharpe-Lintner-Black CAPM inadequately, particularly the explains Pakistan’s equity market economically and statistically significant role of market risk for the determination of expected returns. Instead of identifying more risk factors, a detailed analysis of a single risk factor is undertaken. We have concentrated on two main extensions of the standard CAPM model. First, the standard model is extended by taking higher moments into account. Second, the risk factors are allowed to vary over time in the autoregressive process. The result of unconditional non-linear generalisation of the standard model reveals that in the higher-moment CAPM model the investors are rewarded for co-skewness risk. However, the test provides marginal support for rewards of the co-kurtosis risk. Finally, the empirical usefulness of conditional higher moments in explaining the cross-section of asset return is investigated. The results indicate that the conditional co-skewness is an important determinant of asset pricing, and the asset pricing relationship varies through time. The conditional covariance and the conditional co-kurtosis explain the asset price relationship in a limited way. It is concluded that Kraus and Litzenberger (1976) attempts to develop a modified form of the Sharpe- Lintner-Black CAPM and is more successful with KSE data.Covariance, Co-skewness, Co-kurtosis, Non-normal Return Distribution, Capital Asset Pricing Model, Time-varying Moments.

SHORT-TERM OPTIONS WITH STOCHASTIC VOLATILITY: ESTIMATION AND EMPIRICAL PERFORMANCE

This paper examines the stochastic volatility model suggested by Heston (1993). We employ a time-series approach to estimate the model and we discuss the potential effects of time-varying skewness and kurtosis on the performance of the model. In particular, it is found that the model tends to overprice out-of-the-money calls and underprice in-the-money calls. It is also found that the daily volatility risk premium presents a quite volatile behavior over time; however, our evidence suggests that the volatility risk premium has a negligible impact on the pricing performance of Heston´s model.Stochastic, Volatility, Skewness, Kurtosis, Pricing.

A survey on risk-return analysis

This paper provides a review of the main features of asset pricing models. The review includes single-factor and multifactor models, extended forms of the Capital Asset Pricing Model with higher order co- moments, and asset pricing models conditional on time-varying volatility.Asset pricing, CAPM

Time-Varying Currency Betas: Evidence from Developed and Emerging Markets

This paper examines the conditional time-varying currency betas from five developed markets and four emerging markets. A trivariate BEKK-GARCH-in-mean model is used to estimate the timevarying conditional variance and covariance of returns of stock index, the world market portfolio and changes in bilateral exchange rate between the US dollar and the local currency of each country. It is found that currency betas are more volatile than those of the world market betas. Currency betas in emerging markets are more volatile than those in developed markets. Moreover, we find evidence of long-memory in currency betas. The usefulness of time-varying currency betas are illustrated by two applications.time-varying currency betas; multivariate GARCH-M models; international CAPM; fractionally integrated processes; stochastic dominance

The Intertemporal Relation between Expected Return and Risk on Currency

The literature has so far focused on the risk-return tradeoff in equity markets and ignored alternative risky assets. This paper is the first to examine the presence and significance of an intertemporal relation between expected return and risk in the foreign exchange market. The paper provides new evidence on the intertemporal capital asset pricing model by using high-frequency intraday data on currency and by presenting significant time-variation in the risk aversion parameter. Five-minute returns on the spot exchange rates of the U.S. dollar vis-à-vis six major currencies (the Euro, Japanese Yen, British Pound Sterling, Swiss Franc, Australian Dollar, and Canadian Dollar) are used to test the existence and significance of a daily risk-return tradeoff in the FX market based on the GARCH, realized, and range volatility estimators. The results indicate a positive, but statistically weak relation between risk and return on currency.Foreign exchange market, ICAPM, High-frequency data, Time-varying risk aversion, Daily realized volatility

A Utility Based Approach to Energy Hedging

A key issue in the estimation of energy hedges is the hedgers' attitude towards risk which is encapsulated in the form of the hedgers' utility function. However, the literature typically uses only one form of utility function such as the quadratic when estimating hedges. This paper addresses this issue by estimating and applying energy market based risk aversion to commonly applied utility functions including log, exponential and quadratic, and we incorporate these in our hedging frameworks. We find significant differences in the optimal hedge strategies based on the utility function chosen