Is the ex ante risk premium always positive?

A new approach to testing conditional asset pricing models

Jacob Boudoukh, Matthew Richardson*, Tom Smith

*Corresponding author for this work

Research output: Contribution to journalArticle

60 Citations (Scopus)

Abstract

This paper develops tests of inequality restrictions implied by conditional asset pricing models. The methodology is easy to implement, requires little knowledge of the conditional distribution of asset returns, and is valid under fairly weak assumptions. As an application, we test whether the ex ante risk premium is always positive. We report reliable evidence that the ex ante risk premium is negative in some states of the world; these states are related to periods of high expected inflation and especially to downward-sloping term structures.

Original languageEnglish
Pages (from-to)387-408
Number of pages22
JournalJournal of Financial Economics
Volume34
Issue number3
DOIs
Publication statusPublished - 1993
Externally publishedYes

Keywords

  • ex ante risk premium
  • inequality restrictions
  • conditional asset pricing models

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