W. P. Carey School of Business
Arizona State University
400 E. Lemon Street, BAC 518
Tempe, AZ 85287-3906
NBER Working Papers and Publications
|June 2014||Measuring the Risk-Return Tradeoff with Time-Varying Conditional Covariances|
with Robert J. Hodrick: w20245
We examine the prediction of Merton's intertemporal CAPM that time varying risk premiums arise from the conditional covariances of returns on assets with the return on the market and other state variables. We find a positive and significant price of risk for the covariance with the market return that is driven by the time series variation in the conditional covariances, and the risk-premium on the market remains positive and significant after controlling for additional state variables. Our method estimates the risk-return tradeoff in the ICAPM using multiple portfolios as test assets.
|March 2014||Estimating the Risk-Return Trade-off with Overlapping Data Inference|
with Robert J. Hodrick: w19969
Asset pricing models such as the conditional CAPM are typically estimated with MLE using a monthly or quarterly horizon with data sampled to match the horizon even though daily data are available. We develop an overlapping data inference methodology (ODIN) that uses all of the data while maintaining the monthly or quarterly forecasting period, and we apply it to the conditional CAPM. Our approach recognizes that the first order conditions of MLE can be used as orthogonality conditions of GMM. Using historical data, we find considerable differences in the estimates from the non-overlapping samples that begin on different days.
Published: Esben Hedegaard & Robert J. Hodrick, 2016. "Estimating the risk-return trade-off with overlapping data inference," Journal of Banking & Finance, vol 67, pages 135-145. citation courtesy of