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The intertemporal relationship between market return and variance: an Australian perspective
Author(s) -
Dean Warren G.,
Faff Robert W.
Publication year - 2001
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/1467-629x.00058
Subject(s) - variance risk premium , conditional variance , economics , econometrics , bivariate analysis , variance (accounting) , equity (law) , risk premium , bond , covariance , financial economics , market risk , autoregressive conditional heteroskedasticity , statistics , volatility risk premium , volatility (finance) , mathematics , accounting , finance , political science , law , volatility smile
In this paper we investigate the intertemporal relationship between the market risk premium and its conditional variance in an Australian setting. Using a bivariate EGARCH‐M model combined with the dynamic conditional correlation (DCC) framework as proposed by Engle (2000), we find evidence of a positive relationship between the market risk premium and its variance and evidence of two distinct interest rate effects. Furthermore, while the bond market’s own variance is not priced by investors, we find that the covariance between equity and bond markets is a significant risk factor that is priced in the market.