Understanding Short‐ Versus Long‐Run Risk Premia

25 Pages Posted: 16 Sep 2014

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: September 2014

Abstract

This paper studies the link between short‐ and long‐run risk premia. We extract short‐term risk premia from contemporaneous information on short‐term futures and cash equity markets under the assumption of no arbitrage. Predictability regressions reveal that short‐term risk premia capture different information from long‐run risk premia. Counter to the intuition that a high price of risk commands high returns, high short‐run risk premia on dividend claims predict low returns on the index. While inconsistent with models featuring either habit persistence or long‐run risk, the results may be reconciled with some models of uncertainty aversion.

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

Suggested Citation

Buraschi, Andrea and Carnelli, Andrea, Understanding Short‐ Versus Long‐Run Risk Premia (September 2014). European Financial Management, Vol. 20, Issue 4, pp. 714-738, 2014. Available at SSRN: https://ssrn.com/abstract=2496683 or http://dx.doi.org/10.1111/j.1468-036X.2013.12027.x

Andrea Buraschi (Contact Author)

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

Imperial College London ( email )

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

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