Premium
Understanding Short‐ versus Long‐ R un Risk Premia
Author(s) -
Buraschi Andrea,
Carnelli Andrea
Publication year - 2014
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/j.1468-036x.2013.12027.x
Subject(s) - risk premium , economics , predictability , futures contract , capital asset pricing model , short interest ratio , volatility (finance) , financial economics , short run , econometrics , equity (law) , dividend , monetary economics , finance , political science , law , paleontology , context (archaeology) , physics , quantum mechanics , biology
This paper studies the link between short‐ and long‐run risk premia. We extract short‐term risk premia from contemporaneous information on short‐term futures and cash equity markets under the assumption of no arbitrage. Predictability regressions reveal that short‐term risk premia capture different information from long‐run risk premia. Counter to the intuition that a high price of risk commands high returns, high short‐run risk premia on dividend claims predict low returns on the index. While inconsistent with models featuring either habit persistence or long‐run risk, the results may be reconciled with some models of uncertainty aversion.