Premium
Is the Market Portfolio a Dynamic Factor? Evidence from Individual Stock Returns
Author(s) -
Koutmos Gregory
Publication year - 1997
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.1540-6288.1997.tb00432.x
Subject(s) - economics , market portfolio , econometrics , portfolio , conditional variance , risk premium , stock market , financial economics , replicating portfolio , stock (firearms) , capital market line , portfolio insurance , portfolio optimization , market depth , volatility (finance) , autoregressive conditional heteroskedasticity , paleontology , mechanical engineering , horse , engineering , biology
This paper uses a factor model to test whether the market portfolio is a dynamic factor in the sense that individual stock returns contain a premium linked to the conditional risk of the market portfolio. The market conditional risk is based on a decomposition of the market variance into a time‐varying trend component and a transitory component. The evidence shows that the conditional market premium is rising when the permanent trend rises relative to the conditional variance. The evidence for individual stock returns supports the notion that the market portfolio is a dynamic factor. Individual stock return autocorrelations are fully explained by the time variation in the market premium. The risk premia attributed to static factors are statistically insignificant.