Open AccessEstimation of Market Risk Premium for Japan
Author(s) -
Seoungpil Ahn,
Keshab Shrestha
Publication year - 2009
Publication title -
enterprise risk management
Language(s) - English
Resource type - Journals
ISSN - 1937-7916
DOI - 10.5296/erm.v1i1.58
Subject(s) - econometrics , risk aversion (psychology) , stock market , volatility (finance) , economics , autoregressive conditional heteroskedasticity , risk premium , kalman filter , market risk , mathematics , statistics , financial economics , expected utility hypothesis , paleontology , horse , biology
In this paper, the time series of risk aversion parameter is estimated for the Japanese stock market using weekly return data covering 2/7/1973 to 12/27/2000. The time series of risk aversion parameter is estimated with the Time Varying Parameter (EVP) GARCH-M model proposed by Chou, Engle and Kane (1992), which allows for the risk aversion parameter to change over time by modeling the risk aversion parameter to follow a random walk process. The risk aversion parameter is found to range between 3.5 to 2.2. We also find that the risk aversion parameter has not significantly changed over time. This implies that most of the variation in excess return can be explained by the variation in the market (variance) risk. Keywords: GARCH-M, Kalman Filtering, risk aversion, time-varying parameter, volatility.