Premium
THE POSSIBILITY OF ESTIMATING RISK PREMIA IN ASSET PRICING MODELS
Author(s) -
Sweeney Richard J.,
Warga Arthur D.
Publication year - 1986
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1986.tb01125.x
Subject(s) - risk premium , economics , capital asset pricing model , ex ante , econometrics , consumption based capital asset pricing model , security market line , financial economics , population , stock market , context (archaeology) , geography , demography , archaeology , sociology , macroeconomics
The authors show that estimates of risk premia on the market based on capital asset pricing models or arbitrage pricing theories can only be estimates of the ex post or sample risk premium on the market and cannot be interpreted as better estimates of the ex ante premium than those provided by sample averages of data. The ex ante premium drops out of the generating function for the returns used in the second‐pass regressions. Although previous estimates of nonmarket premia have failed to take appropriate account of the population mean, that mean can in fact be estimated and appropriate adjustments made. Various approaches to estimating the ex ante risk premium and the population mean are discussed.