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Title: Forward-looking market risk premium and its economic implications Authors:  Shuyuan Qi - University of Reading (United Kingdom) [presenting]
Emese Lazar - University of Reading (United Kingdom)
Radu Tunaru - University of Sussex (United Kingdom)
Abstract: The forward-looking market risk premium (FMRP) is a function of investors risk aversion and forward-looking volatility, skewness, and kurtosis of cumulative return. Using the S\&P 500 index returns and VIX, we estimate the monthly FMRP from 1999 to 2020. We find that the FMRP estimated from the stochastic volatility model with a mean-reversion variance process adequately reflects market conditions and is always positive. We also find that the FMRP is significantly positively linked to the future market sentiment and significantly negatively linked to the future growth of real economic activities. Moreover, the market excess returns increase with FMRP under good market conditions and decrease with FMRP under bad market conditions.