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 journalArticle

58 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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