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TIME VARIATIONS IN RISK PREMIA, VOLATILITY, AND REWARD‐TO‐VOLATILITY
Author(s) -
Li Yuming
Publication year - 1998
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1998.tb00696.x
Subject(s) - volatility risk premium , volatility (finance) , economics , predictability , forward volatility , volatility swap , stock (firearms) , volatility smile , bond , risk premium , econometrics , financial economics , implied volatility , volatility risk , variance swap , stochastic volatility , finance , mathematics , statistics , mechanical engineering , engineering
In this paper I relate the risk premia in the stock and bond markets to the conditional volatility of returns and time‐varying reward‐to‐volatility variables. I find that the relation between the expected returns on the stocks and bonds and the volatility of returns is time varying. I provide an approach for evaluating the relative importance of the time‐varying volatility of returns and reward‐to‐volatility variables to explain the predictability of risk premia for stock and bond returns. I show that changing reward‐to‐volatility variables explain more predictable variation in the risk premia for stocks and bonds than changing volatility of returns.