Modeling the Time-Varying Risk Premium Using a Mixed GARCH and Jump Diffusion Model
26 Pages Posted: 24 Jul 2011
Date Written: July, 22 2011
In this paper, we employ a combination of the jump diffusion and GARCH model in the mean equation to test the risk-return relationship in the U.S. stock returns. The results suggest a statistically significant relationship between the risk and the return if the risk measure includes components of smoothly changing variance and jump events. These results are not consistently observed when the traditional GARCH in the mean modeling is used.
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