Is the ex-ante equity risk premium always positive? Evidence from a new conditional expectations model

Khoa Hoang*, Robert Faff

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

2 Downloads (Pure)

Abstract

We model the conditional risk premium by combining principal component analysis and a statistical learning technique, known as boosted regression trees. The method is validated through various out-of-sample tests. We apply the estimates to test the positivity restriction on the risk premium and find evidence that the risk premium is negative in periods of low corporate and government bond returns, high inflation and downward-sloping term structure. These periods are linked with changes in business cycles; the states when theories predict the existence of negative risk premium. Based on the evidence, we reject the conditional capital asset pricing model and raise a question over the practice of imposing the positive risk premium constraint in predictive models.

Original languageEnglish
Pages (from-to)95-124
Number of pages30
JournalAccounting and Finance
Volume61
Issue number1
Early online date19 Oct 2019
DOIs
Publication statusPublished - Mar 2021
Externally publishedYes

Fingerprint

Dive into the research topics of 'Is the ex-ante equity risk premium always positive? Evidence from a new conditional expectations model'. Together they form a unique fingerprint.

Cite this