Dynamic Asset Pricing and Statistical Properties of Risk

Within the framework of the conditional Arbritage Pricing Theory, estimators of conditional risk are not unique. We focus on an estimator of conditional risk based on the conditional volatility of the asset return. Estimates of conditional risk account for: 1) interdependence of conditional and unconditional moments of the asset return; 2) effect of the conditional and unconditional fourth moments of the asset return; and 3) force of the conditional volatility process, such that, assets with forceful conditional volatility specifications are empirically riskier, ceteris paribus. This is in contrast to the unconditional theory, where unconditional risk is the unconditional covariance of the asset return with a benchmark portfolio. © 1998 Elsevier Science Inc.