Modeling Covariance Risk in Merton's ICAPM

• 成果类型: Article
• 署名作者: Rossi, Alberto G.; Timmermann, Allan
• 署名单位: University System of Maryland; University of Maryland College Park; University of California System; University of California San Diego
• 刊物名称: REVIEW OF FINANCIAL STUDIES
• ISSN/ISSBN: 0893-9454
• DOI: 10.1093/rfs/hhv015
• 发表日期: 2015
• 页码: 1428
• 关键词: STOCK RETURNS; INTERTEMPORAL RELATION; asset returns; Market risk; volatility; consumption; tests; heteroskedasticity; income; sample

摘要

We propose a new method for constructing the hedge component in Merton's ICAPM that uses a daily summary measure of economic activity to track time-varying investment opportunities. We then use nonparametric projections to compute a robust estimate of the conditional covariance between stock market returns and our daily economic activity index. We find that the new conditional covariance risk measure plays an important role in explaining time variation in the equity risk premium. Specification tests as well as out-of-sample forecasts of aggregate stock returns suggest that the new covariance risk measure performs well compared to alternative covariance measures previously proposed in the literature.