Generalized Risk Premia – the Economic Value of Predictability
نویسندگان
چکیده
Using a new measure for predictability combining economic and statistical criteria I find that in the S&P 500 market neither stochastic volatility, nor valuationbased information are advantageous over a homoscedastic return model. The testing framework is based on a benchmark trading strategy with optimal Sharpe ratio. The strategy’s expected excess returns naturally accommodate compensation for higher-order moment risk, to first order variance risk and the equity premium. Further analysis of the price of moment risk reveals a connection between flight-to-quality in crisis periods and the compensation for variance, skew and kurtosis risk.
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