Countercyclical and time-varying reward to risk and the equity premium

Research in International Business and Finance, 2023, Volume 66, 102017.

Posted: 24 Mar 2016 Last revised: 19 Jun 2023

See all articles by Jan Antell

Jan Antell

HANKEN School of Economics

Mika Vaihekoski

University of Turku, Turku School of Economics; University of Turku - Turku School of Economics

Date Written: May 15, 23

Abstract

We study whether the equity premium is related to volatility or variance, whether the reward to market risk is positive, and whether it behaves in a counter-cyclical fashion. Using APARCH models for the conditional market risk, we compare the traditional and the new testing approach of Antell and Vaihekoski (2019) on the monthly US equity premium from 1928 to 2018. The results from the new approach give stronger support for the pricing of volatility rather than variance and for positive reward to market risk. The support for timevarying and countercyclical reward to risk coefficient is smaller than previously thought.

Keywords: Conditional asset pricing, Equity premium, Reward to risk, Market risk, Business cycles

JEL Classification: G12

Suggested Citation

Antell, Jan and Vaihekoski, Mika and Vaihekoski, Mika, Countercyclical and time-varying reward to risk and the equity premium (May 15, 23). Research in International Business and Finance, 2023, Volume 66, 102017. , Available at SSRN: https://ssrn.com/abstract=2753537 or http://dx.doi.org/10.2139/ssrn.2753537

Jan Antell

HANKEN School of Economics ( email )

P.O. Box 479
FI-00101 Helsinki, 00101
Finland

Mika Vaihekoski (Contact Author)

University of Turku - Turku School of Economics ( email )

Turku, 20014
Finland

HOME PAGE: http://users.utu.fi/moovai/

University of Turku, Turku School of Economics ( email )

Turku School of Economics
Dep. of Accounting and Finance
University of Turku, 20014
Finland
+358 2 33351 (Phone)

HOME PAGE: http://users.utu.fi/moovai/

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