The Cross-Sectional Risk Premium of Decomposed Market Volatility in UK Stock Market
نویسندگان
چکیده
We decompose UK market volatility into shortand long-run components using EGARCH component model and examine the cross-sectional prices of the two components. Our empirical results suggest that these two components are significantly priced in the cross-section and the negative risk premia are consistent with the existing literature. The Fama-French three-factor model is improved by the inclusion of the two volatility components. However, our ICAPM model using market excess return and the decomposed volatility components as state variables compares inferiorly to the traditional three-factor model.
منابع مشابه
The Effects of Sentiment on Market Return and Volatility and The Cross-Sectional Risk Premium of Sentiment-affected Volatility
We construct investor sentiment of UK stock market using the procedure of principal component analysis. Using sentiment-augmented EGARCH component model, we analyse the impacts of sentiment on market excess return, the permanent component of market volatility and the transitory component of market volatility. Bullish sentiment leads to higher market excess return while bearish sentiment leads t...
متن کاملMarket Volatility Puzzle with Regard to the Systematic Risk of Bubble in the Securities Market of Iran
Stock market volatility is evaluated by measuring the variance of the market that is evaluated through consumption growth volatility in the framework of pricing of CCAPM models. This theory is not consistent with revealed facts, in reality; because consumption growth is very smooth but stock market appears highly volatile; this is famous to stock market volatility puzzle. In this regard, the ne...
متن کاملThe Factor Structure of Realized Volatility and its Implications for Option Pricing
The cross-section of realized return volatilities of US equities between 1965-2004 is well described by a linear factor structure. We show that the identified factor structure has important cross-sectional pricing implications for variance swap contracts. The principal volatility factor accounts for almost 40% of the cross-sectional variation in realized stock volatilities and earns a significa...
متن کاملNoise Trading Approach of Capital Asset Pricing at Tehran Stock Exchange
Noise traders as one of the key elements of the market play a significant role in determining the market volatilities, returns, and stock market mispricing. Hence, this study attempts to scrutinize the role of noise trading in capital asset pricing. Therefore, by using daily data, samples including 14105 data of 200 companies listed on stock exchange were selected and noise trading index was es...
متن کاملDo Newly Listed Derivatives Affect the Market Risk Premium in a Thin Stock Market?
This study examines the effects on the stock market unitary risk premium and volatility associated with the listing of stock and stock index derivatives in Switzerland. Based on a univariate GARCH (1,1) specification of the stock index variance and a time-varying unitary risk premium representation, we can reject the hypothesis that stock and stock index derivatives listings do not affect the t...
متن کامل