Resolving the Puzzling Intertemporal Relation Between the Market Risk Premium and the Conditional Market Variance: A Two Factor Approach
John T. Scruggs
Barclays Global Investors
Journal of Finance, Vol. 53, No. 2, April 1998
The existing empirical literature fails to agree on the nature of the intertemporal relation between risk and return. This paper attempts to resolve the issue by estimating a conditional two-factor model motivated by Merton's intertemporal capital asset pricing model. When long-term government bond returns are included as a second factor, the partial relation between the market risk premium and conditional market variance is found to be positive and significant. The paper also helps explain the convoluted empirical relation between the market risk premium, conditional market variance and the nominal risk-free rate reported in the literature.
JEL Classification: G12Accepted Paper Series
Date posted: August 8, 1998
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo4 in 0.313 seconds