The intertemporal relationship between market return and variance: an Australian perspective

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Abstract:

In this paper we investigate the intertemporal relationship between the market risk premium and its conditional variance in an Australian setting. Using a bivariate EGARCH‐M model combined with the dynamic conditional correlation (DCC) framework as proposed by Engle (2000), we find evidence of a positive relationship between the market risk premium and its variance and evidence of two distinct interest rate effects. Furthermore, while the bond market’s own variance is not priced by investors, we find that the covariance between equity and bond markets is a significant risk factor that is priced in the market.

Keywords: Asset pricing; Bond factor; EGARCH‐M model; ICAPM

Document Type: Original Article

DOI: http://dx.doi.org/10.1111/1467-629X.00058

Affiliations: School of Economics and Finance, RMIT University, GPO Box 2476V, Melbourne, Australia, 3000

Publication date: November 1, 2001

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