Abstract

http://ssrn.com/abstract=795386
 
 

References (44)



 
 

Citations (14)



 


 



Time-Varying Conditional Skewness and the Market Risk Premium


Akhtar R. Siddique


Office of the Comptroller of the Currency - Enterprise Risk Analysis Division

Campbell R. Harvey


Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

March 9, 2000


Abstract:     
Single factor asset pricing models face two major hurdles: the problematic time-series properties of the ex ante market risk premium and the inability of the risk measure to account for a substantial degree of the cross-sectional variation of expected excess returns. We provide an explanation for the first failure using the following intuition: if investors know that the asset returns have conditional skewness given the information known today, the expected excess returns should include rewards for accepting skewness. We formalize this intuition with an asset pricing model which incorporates conditional skewness. We decompose the expected excess returns into components due to conditional variance and skewness. Our results show that conditional skewness is important and, when combined with the economy-wide reward for skewness, helps explain the time-variation of the ex ante market risk premiums. Conditional skewness has greater success in explaining the ex ante risk premium for the world portfolio than for the U.S. portfolio.

Number of Pages in PDF File: 34

Keywords: Risk premium, reward to risk, volatility, skewness, risk premium puzzle, reward for skewness

JEL Classification: G12


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Date posted: September 9, 2005  

Suggested Citation

Siddique, Akhtar R. and Harvey, Campbell R., Time-Varying Conditional Skewness and the Market Risk Premium (March 9, 2000). Available at SSRN: http://ssrn.com/abstract=795386 or http://dx.doi.org/10.2139/ssrn.795386

Contact Information

Akhtar R. Siddique
Office of the Comptroller of the Currency - Enterprise Risk Analysis Division ( email )
400 7th Ave
Washington, DC 20219
United States
202-649-5526 (Phone)
Campbell R. Harvey (Contact Author)
Duke University - Fuqua School of Business ( email )
Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)
919-660-8030 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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