Understanding Short and Long-Run Risk Premia

39 Pages Posted: 18 Mar 2012 Last revised: 25 May 2013

See all articles by Andrea Buraschi

Andrea Buraschi

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Andrea Carnelli

Imperial College London

Date Written: May 2013

Abstract

This paper studies the predictability of S&P500 returns using short term risk premia as a conditioning variable. We construct dividend prices using futures data and identify short term risk premia by projecting excess returns of dividend claims on their lagged prices. Regression results for forecasting horizons from 1 to 4 quarters show that time variation in short term risk premia captures time variation in index excess returns, albeit with the wrong sign. Counter to the intuition that a high price of risk commands high returns, high risk premia on dividend claims predict low returns on the index. We discuss the extent to which existing asset pricing model are able to generate these patterns of predictability. We find that models with either habit persistence or long run risk are not consistent with these results.

Keywords: equity risk premium, predictability, dividend prices, asset pricing models, term structure

JEL Classification: G10, G12, G13

Suggested Citation

Buraschi, Andrea and Carnelli, Andrea, Understanding Short and Long-Run Risk Premia (May 2013). Available at SSRN: https://ssrn.com/abstract=2023712 or http://dx.doi.org/10.2139/ssrn.2023712

Andrea Buraschi

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

HOME PAGE: http://www.andreaburaschi.com/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Andrea Carnelli (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

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