Recovering the Market Risk Premium from Higher-Order Moment Risks

European Financial Management

59 Pages Posted: 12 Mar 2016 Last revised: 6 Apr 2022

See all articles by George Chalamandaris

George Chalamandaris

Athens University of Economics and Business - Department of Accounting and Finance

Leonidas Rompolis

Athens University of Economics and Business - Department of Accounting and Finance

Date Written: September 17, 2020

Abstract

We propose a consistent approach for the estimation of the
market risk premium. As a first step, we define the broadest possible set of
ex ante estimators from the viewpoint of a power utility optimizer holding the
market portfolio. We then employ an evaluation framework to optimize the
parametrization of the methodology. We show that this theoretical framework
can still produce reasonable market risk premium estimates, even when the
representative agent is not a power utility optimizer. Our results show that
the inclusion of higher-order moment risk premia improves the accuracy of the method.

Keywords: Ex ante market risk premium; risk aversion coefficient; physical cumulants; risk-neutral cumulants

JEL Classification: G12, G17, C51, C53

Suggested Citation

Chalamandaris, George and Rompolis, Leonidas, Recovering the Market Risk Premium from Higher-Order Moment Risks (September 17, 2020). European Financial Management, Available at SSRN: https://ssrn.com/abstract=2745879 or http://dx.doi.org/10.2139/ssrn.2745879

George Chalamandaris

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

Leonidas Rompolis (Contact Author)

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

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