A Simple Model for Time-Varying Expected Returns on the S&P 500 Index

Journal of Investment Management, Forthcoming

41 Pages Posted: 29 Aug 2005 Last revised: 26 Feb 2009

See all articles by James Doran

James Doran

University of New South Wales

Ehud I. Ronn

University of Texas at Austin - Department of Finance

Robert S. Goldberg

Adelphi University - School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: October 31, 2008

Abstract

This paper presents a parsimonious, implementable model for the estimation of the short- and long-term expected rates of return on the S&P 500 stock market Index. The model estimates a parametric form for the Market Price of Risk, the Sharpe Ratio, of the S&P 500 Index. In addition to short- and long-term riskfree rates of interest, the model's empirical estimation makes use of two forward-looking measures: The economy's growth rate estimate; and the option market's (priced) implied volatility on the S&P 500 Index. The model accounts for past rates of return by modeling and estimating the impact of an assumed increasing relative risk aversion, which gives rise to an increased willingness to invest in risky assets as the realized rate of return for the recent past is "high".

Keywords: Risk Premium, Time-Series, Growth-Rates, S&P 500, VIX Index

JEL Classification: G10, g12

Suggested Citation

Doran, James and Ronn, Ehud I. and Goldberg, Robert S., A Simple Model for Time-Varying Expected Returns on the S&P 500 Index (October 31, 2008). Journal of Investment Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=788825

James Doran (Contact Author)

University of New South Wales ( email )

College Rd
Sydney, NSW 2052
Australia

Ehud I. Ronn

University of Texas at Austin - Department of Finance ( email )

Graduate School of Business
Austin, TX 78712
United States
512-471-5853 (Phone)
512-471-5073 (Fax)

Robert S. Goldberg

Adelphi University - School of Business

Garden City, NY 11530
United States

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