The long and the short of the risk-return trade-off?

Bonomo, Marco, Garcia, René, Meddahi, Nour and Tédongap, Roméo (2015) The long and the short of the risk-return trade-off? Journal of Econometrics, 187 (n°2). pp. 580-592.

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Official URL: http://tse-fr.eu/pub/30790

Abstract

The relationship between conditional volatility and expected stock market returns, the so-called riskreturn trade-off, has been studied at high- and low-frequency. We propose an asset pricing model with generalized disappointment aversion preferences and short- and long-run volatility risks that captures several stylized facts associated with the risk-return trade-off at short and long horizons. Writing the model in Bonomo et al. (2011) at the daily frequency, we aim at reproducing the moments of the variance premium and realized volatility, the long-run predictability of cumulative returns by the past cumulative variance, the short-run predictability of returns by the variance premium, as well as the daily autocorrelation patterns at many lags of the VIX and of the variance premium, and the daily crosscorrelations of these two measures with leads and lags of daily returns. By keeping the same calibration as in this previous paper, we ensure that the model is capturing the first and second moments of the equity premium and the risk-free rate, and the predictability of returns by the dividend yield. Overall adding generalized disappointment aversion to the Kreps–Porteus specification improves the fit for both the short-run and the long-run risk-return trade-offs.

Item Type: Article
Language: English
Date: August 2015
Refereed: Yes
Uncontrolled Keywords: Equilibrium asset pricing, Time-aggregation, Realized measures
JEL codes: C1 - Econometric and Statistical Methods - General
C5 - Econometric Modeling
G1 - General Financial Markets
G11 - Portfolio Choice; Investment Decisions
G12 - Asset Pricing; Trading volume; Bond Interest Rates
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 14 Sep 2016 07:47
Last Modified: 24 Jan 2019 00:13
OAI ID: oai:tse-fr.eu:30790
URI: http://publications.ut-capitole.fr/id/eprint/22356

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