Abstract
Many statistical models of time-varying risk premiums, including the autoregressive conditional heteroscedasticity (ARCH)-in-mean, attempt to exploit a relation between risk premiums and conditional variances or covariances of asset returns. We examine this relation in numerical versions of a dynamic asset-pricing theory and show that it can be increasing, decreasing, flat, or nonmonotonic. Its shape depends on both the preferences of the representative agent and the stochastic structure of the economy. Without additional structure, the theory does not provide either a general foundation for ARCH-in-mean specifications or a simple interpretation of their parameters.
Keywords
HeteroscedasticityEconometricsConditional expectationConditional varianceRisk premiumArchAutoregressive modelAutoregressive conditional heteroskedasticityEconomicsAsset (computer security)Capital asset pricing modelMathematicsComputer scienceVolatility (finance)
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Publication Info
- Year
- 1993
- Type
- article
- Volume
- 11
- Issue
- 2
- Pages
- 177-185
- Citations
- 206
- Access
- Closed
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Cite This
David Backus,
Allan W. Gregory
(1993).
Theoretical Relations Between Risk Premiums and Conditional Variances.
Journal of Business and Economic Statistics
, 11
(2)
, 177-185.
https://doi.org/10.1080/07350015.1993.10509946
Identifiers
- DOI
- 10.1080/07350015.1993.10509946