What is it about?
This paper tests whether the equity premium is a function of variance or volatility following Merton (1980) using the reverse testing approach of Antell and Vaihekoski (JEF 2019). We also test whether the reward to risk is time-varying with the business cycles.
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Why is it important?
This paper tests a model for the equity premium, one of the key parameters in finance. Knowing how the equity premium behaves can help investors (e.g., pension funds, individuals, wealth managers) to make better investment decisions.
Perspectives
This is a follow-up article to Antell and Vaihekoski (JEF 2019). We have now improved our analysis with a step-back look at the basis of our earlier paper.
Professor Mika Vaihekoski
Turun Yliopisto
Read the Original
This page is a summary of: Countercyclical and time-varying reward to risk and the equity premium, Research in International Business and Finance, October 2023, Elsevier,
DOI: 10.1016/j.ribaf.2023.102017.
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