Equity Premia and State-Dependent Risks

CIRPEE Working Paper 10-19

43 Pages Posted: 21 May 2010

See all articles by Mohammed Bouaddi

Mohammed Bouaddi

The American University in Cairo

Denis Larocque

HEC Montreal - Department of Management Sciences

Michel Normandin

HEC Montreal - Institute of Applied Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 20, 2010

Abstract

This paper analyzes the empirical relations between equity premia and state-dependent consumption and market risks. These relations are derived from a flexible specification of the CCAPM with mixture distribution, which admits the existence of two regimes. Focusing on the market return, we find that the consumption and market risks are priced in each state, and the responses of expected equity premia to these risks are state dependent. Extending to various portfolio returns, we show that the responses to downside consumption risks are the most important, they are almost always statistically larger than the responses to upside consumption risks, and they are much larger for firms having smaller sizes and facing more financial distresses.

Keywords: Mixture of truncated normals, downside and upside consumption and market risks

JEL Classification: C16, G12

Suggested Citation

Bouaddi, Mohammed and Larocque, Denis and Normandin, Michel, Equity Premia and State-Dependent Risks (May 20, 2010). CIRPEE Working Paper 10-19, Available at SSRN: https://ssrn.com/abstract=1612394 or http://dx.doi.org/10.2139/ssrn.1612394

Mohammed Bouaddi

The American University in Cairo ( email )

P.O. Box 2511
Cairo
Egypt

Denis Larocque

HEC Montreal - Department of Management Sciences ( email )

Montreal, Quebec H3T 2A7
Canada

Michel Normandin (Contact Author)

HEC Montreal - Institute of Applied Economics ( email )

3000, ch. de la Côte-Ste-Catherine
Montréal, Quebec H3T 2A7
Canada

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