Modeling the Time-Varying Risk Premium Using a Mixed GARCH and Jump Diffusion Model

26 Pages Posted: 24 Jul 2011

See all articles by Bala Arshanapalli

Bala Arshanapalli

Indiana University Northwest - School of Business & Economics

Frank J. Fabozzi

EDHEC Business School

William Nelson

Indiana University Northwest

Date Written: July, 22 2011

Abstract

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.

Suggested Citation

Arshanapalli, Bala and Fabozzi, Frank J. and Nelson, William, Modeling the Time-Varying Risk Premium Using a Mixed GARCH and Jump Diffusion Model (July, 22 2011). Available at SSRN: https://ssrn.com/abstract=1893038 or http://dx.doi.org/10.2139/ssrn.1893038

Bala Arshanapalli (Contact Author)

Indiana University Northwest - School of Business & Economics ( email )

3400 Broadway
Gary, IN 46408
United States
219-980-6919 (Phone)

Frank J. Fabozzi

EDHEC Business School ( email )

France
215 598-8924 (Phone)

William Nelson

Indiana University Northwest ( email )

Gary, IN 46408
United States

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