Equity Market Volatility and Expected Risk Premium

Federal Reserve Bank St. Louis Working Paper No. 2006-007

40 Pages Posted: 31 Jan 2006

See all articles by Long Chen

Long Chen

Cheung Kong Graduate School of Business

Hui Guo

University of Cincinnati - Department of Finance - Real Estate

Lu Zhang, 张橹

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Date Written: January 2006

Abstract

This paper revisits the time-series relation between the conditional risk premium and variance of the equity market portfolio. The main innovation is that we construct a measure of the ex ante equity market risk premium using corporate bond yield spread data. This measure is forward-looking and does not rely critically on either realized equity returns or instrumental variables. We find strong support for a positive risk-return tradeoff, and this result is not sensitive to a number of robustness checks, including alternative proxies of the conditional stock variance and controls for hedging demands.

Keywords: Expected return, equity market volatility, systematic risk, yield spreads

JEL Classification: G12, E44

Suggested Citation

Chen, Long and Guo, Hui and Zhang, Lu, Equity Market Volatility and Expected Risk Premium (January 2006). Available at SSRN: https://ssrn.com/abstract=878687 or http://dx.doi.org/10.2139/ssrn.878687

Long Chen (Contact Author)

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China

Hui Guo

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business
418 Carl H. Lindner Hall
Cincinnati, OH 45221
United States
513.556.7077 (Phone)
513.556.0979 (Fax)

HOME PAGE: http://homepages.uc.edu/~guohu/

Lu Zhang

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
585-267-6250 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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