The Time-Variation of Risk and Return in the Foreign Exchange and Stock Markets / Alberto Giovannini, Philippe Jorion.

Format:

Book

Author/Creator:

Giovannini, Alberto.

Contributor:

National Bureau of Economic Research.

Jorion, Philippe.

Series:

Working Paper Series (National Bureau of Economic Research) no. w2573.

NBER working paper series no. w2573

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1988.

Summary:

Recent empirical work indicates that, in a variety of financial markets, both conditional expectations and conditional variances of returns are time- varying. The purpose of this paper is to determine whether these joint fluctuations of conditional first and second moments are consistent with the Sharpe-Lintner-Mossin capital-asset-pricing model. We test the mean-variance model under several different assumptions about the time-variation of conditional second moments of returns, using weekly data from July 1974 to December 1986, that include returns on a portfolio composed of dollar, Deutsche mark, Sterling, and Swiss franc assets, together with the US stock market. The model is estimated constraining risk premia to depend on the time-varying conditional covariance matrix of the residuals of the expected returns equations. The results indicate that estimated conditional variances cannot explain the observed time-variation of risk premia. Furthermore, the constraints imposed by the static CAPH are always rejected.

Notes:

Print version record

May 1988.