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Macrofactor Conditional Volatilities, Time‐Varying Risk Premia and Stock Return Behavior
Author(s) -
Koutoulas George,
Kryzanowski Lawrence
Publication year - 1996
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.1540-6288.1996.tb00869.x
Subject(s) - economics , econometrics , risk premium , index (typography) , autoregressive model , stock market index , stock (firearms) , financial economics , stock market , geography , world wide web , computer science , context (archaeology) , archaeology
An Arbitrage Pricing Model is estimated in which the risk premia vary in proportion to the conditional volatilities of the macroeconomic innovations which follow an autoregressive specification. The conditional volatilities of the macroeconomic innovations exhibit strong timevariation from month to month. For size‐ranked portfolios of all the shares traded on the Toronto Stock Exchange over the period from March 1962 through March 1988, five macrofactors (namely, the lag of industrial production, the Canadian index of 10 leading indicators, the U.S. composite index of 12 leading indicators, the exchange rate and the residual market factor) have time‐varying and priced risk premia. The small‐firm effect is absent in the risk‐adjusted returns, and a significant portion of the observed January seasonality is explained by the model with time‐varying risk premia.