Resolving the Puzzling Intertemporal Relation between the Market Risk Premium and the Conditional Market Variance: A Two Factor Approach

Posted: 8 Aug 1998

Abstract

The existing empirical literature fails to agree on the nature of the intertemporal relation between risk and return. This paper attempts to resolve the issue by estimating a conditional two-factor model motivated by Merton's intertemporal capital asset pricing model. When long-term government bond returns are included as a second factor, the partial relation between the market risk premium and conditional market variance is found to be positive and significant. The paper also helps explain the convoluted empirical relation between the market risk premium, conditional market variance and the nominal risk-free rate reported in the literature.

JEL Classification: G12

Suggested Citation

Scruggs, John T., Resolving the Puzzling Intertemporal Relation between the Market Risk Premium and the Conditional Market Variance: A Two Factor Approach. Available at SSRN: https://ssrn.com/abstract=99829

John T. Scruggs (Contact Author)

Allianz Global Investors ( email )

555 Mission Street
Suite 1700
San Francisco, CA 94105
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
1,063
PlumX Metrics