A New Formula for the Expected Excess Return of the Market

41 Pages Posted: 15 Oct 2019 Last revised: 13 Apr 2020

See all articles by Gurdip Bakshi

Gurdip Bakshi

Fox School of Business

John Crosby

University of Maryland - Robert H. Smith School of Business

Xiaohui Gao Bakshi

Fox School of Business, Temple University

Wei Zhou

affiliation not provided to SSRN

Date Written: September 1, 2019

Abstract

Key to deriving the lower bound to the expected excess return of the market in Martin (2017) is the assumption of the negative correlation condition (NCC). We improve on the lower bound characterization by proposing an exact formula for the conditional expected excess return of the market. In our formula, each risk-neutral return central moment contributes to the expected excess return and is representable in terms of known option prices. To interpret theoretical and empirical distinctions between our formula and the lower bound, we develop and study the asset-pricing restrictions of the NCC.

Keywords: expected excess return of the market, negative correlation condition, lower bound, market risk premium

JEL Classification: G11, G12, G13

Suggested Citation

Bakshi, Gurdip S. and Crosby, John and Gao, Xiaohui and Zhou, Wei, A New Formula for the Expected Excess Return of the Market (September 1, 2019). Fox School of Business Research Paper. Available at SSRN: https://ssrn.com/abstract=3464298 or http://dx.doi.org/10.2139/ssrn.3464298

Gurdip S. Bakshi

Fox School of Business ( email )

Department of Finance
Philadelphia, PA 19022
United States
215-204-6117 (Phone)
tuk40718@temple.edu (Fax)

HOME PAGE: http://https://sites.google.com/view/gurdipbakshi1

John Crosby (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
+447979901892 (Phone)

HOME PAGE: http://www.john-crosby.co.uk/

Xiaohui Gao

Fox School of Business, Temple University ( email )

Philadelphia, PA 19122
United States

Wei Zhou

affiliation not provided to SSRN ( email )

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
66
Abstract Views
662
rank
366,504
PlumX Metrics