Market Price of Risk Estimation: Does Distribution Matter?

Communications in Statistics - Theory and Methods, Forthcoming

33 Pages Posted: 28 Jan 2021

See all articles by Panayiotis Theodossiou

Panayiotis Theodossiou

Cyprus University of Technology

Christos S. Savva

Cyprus University of Technology - Department of Commerce, Finance and Shipping

Date Written: December 26, 2020

Abstract

This study re-examines the risk-return relation using a contemporaneous asset pricing model under various probability distribution functions that account for skewness and kurtosis effects in the data. Once these effects are taken into account a positive risk premium is established, suggesting that a failure to account for the effects of higher moments on the risk-return trade-off is the main reason for the mixed results documented in the literature. The best estimates are given by the skew generalized t distribution.

Keywords: risk premium; skewness premium; skew distributions

JEL Classification: C18; C22; G15

Suggested Citation

Theodossiou, Panayiotis and Savva, Christos S., Market Price of Risk Estimation: Does Distribution Matter? (December 26, 2020). Communications in Statistics - Theory and Methods, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3755442

Panayiotis Theodossiou (Contact Author)

Cyprus University of Technology ( email )

Limassol, 3603
Cyprus

Christos S. Savva

Cyprus University of Technology - Department of Commerce, Finance and Shipping ( email )

Limassol, 3603
Cyprus
00357252349 (Phone)
00357252674 (Fax)

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

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