Is there a positive relationship between stock market volatility and the equity premium?

Chang Jin Kim, James C. Morley, Charles R. Nelson

    Research output: Contribution to journalArticlepeer-review

    72 Citations (Scopus)

    Abstract

    This paper investigates whether evidence for a positive relationship between stock market volatility and the equity premium is more decisive when the volatility feedback effects of large and persistent changes in market volatility are taken into account. The analysis has two components. First, a loglinear present value framework is employed to derive a formal model of volatility feedback under the assumption of Markov-switching market volatility. Second, the model is estimated for a variety of assumptions about information available to economic agents. The empirical results suggest the existence of a negative and significant volatility feedback effect, supporting a positive relationship between stock market volatility and the equity premium.

    Original languageEnglish
    Pages (from-to)339-360
    Number of pages22
    JournalJournal of Money, Credit and Banking
    Volume36
    Issue number3 I
    DOIs
    Publication statusPublished - 2004 Jun

    Keywords

    • Equity premium
    • Markov switching
    • Volatility feedback

    ASJC Scopus subject areas

    • Accounting
    • Finance
    • Economics and Econometrics

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