Premium
Changing Risk Premia: Evidence from a Small Open Economy
Author(s) -
Hansson Björn,
Hördahl Peter
Publication year - 1997
Publication title -
scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/1467-9442.00066
Subject(s) - economics , risk premium , autoregressive conditional heteroskedasticity , capital asset pricing model , stock (firearms) , small open economy , stock market , financial economics , econometrics , monetary economics , volatility (finance) , exchange rate , mechanical engineering , paleontology , horse , engineering , biology
Little is known about the differences in the relation between risk and return in large economies such as the U.S. compared with smaller, less studied, markets. In this paper, Sweden serves as a representative for small open economies. The price of risk on the Swedish stock market is estimated using a conditional asset pricing model that allows for time variation in the risk. Four different GARCH‐M models are used in the econometric specification. The estimates of the price of risk are invariably positive and significant, and we conclude that there exists a time‐varying risk premium in the Swedish stock market. Our results show that there are small differences in the preferences towards risk of representative investors in small and large economies.