Equity Market Volatility and Expected Risk Premium

  • Chen L
  • Guo H
  • Zhang, 张橹 L
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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.

Author-supplied keywords

  • E44
  • Expected return
  • G12
  • equity market volatility
  • systematic risk
  • yield spreads

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  • Long Chen

  • Hui Guo

  • Lu Zhang, 张橹

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