On the conditional forecast of the market risk premium and its economic significance from a long time series perspective

dc.creatorPeng, Zhuoming
dc.date.available2011-02-18T23:24:15Z
dc.date.issued2002-05
dc.degree.departmentBusiness Administrationen_US
dc.description.abstractThe equity return data in Wilson and Jones (2002) used in this dissertation previously has not been available for research. This dissertation also is the first attempt in the literature to examine the forecastibility of the annual market risk premium with nonoverlapping observations. Forecasts of the market risk premium obtained with the regression models specified in Equations (3,6a) and (3,6b) and Equations (3,10a) and (3,10b) of this dissertation represent a new approach in the literature. Aggregate leverage variable and the levels of the previous market risk premiums are new variables employed in the regression models. By employing the longest equity return data for the last 130 years and the new regression models, the empirical evidence found in this dissertation generally indicates that the dividend yield series does posses the forecasting power towards the expected market risk premiums. The new testing models represented by Equations (3,6a) and (3,6b) appear to be good forecasting models. Especially, the conditional volatility estimated by EGARCH (1,1) specification can help to forecast the level of the expected market excess returns sampled with three different intervals, namely, annual, quarterly, and monthly. However, the relationship between the conditional mean, i,e,, the return, and the conditional volatility, i.e.,, the risk, of the expected return appears to be less correlated over time. The relationship between the monthly conditional mean and its conditional volatility from January 1914 to December 1956 remains negative, despite the fact that the short-term T-bill rates have been excluded from the set of explanatory variables. In addition, this relationship is not statistically significant in the last subperiod, January 1957 to December 1999, As such, it remains to be seen how financial economists may explain these puzzles in future research. Both quarterly and monthly ex ante market risk premiums appear to have mean-reverting tendencies. The monthly forecasting models do appear possessing economic significance. The evidence of the aggregate leverage {AL) having forecasting value is weak in the annual data, but there is some evidence that the AL variable may forecast the monthly and quarterly excess returns. Last but not least, the "manufactured" annual dividend yield data from 1802 to 1870 in Schwert (1990) does not appear having forecasting values.
dc.format.mimetypeapplication/pdf
dc.identifier.urihttp://hdl.handle.net/2346/19931en_US
dc.language.isoeng
dc.publisherTexas Tech Universityen_US
dc.rights.availabilityUnrestricted.
dc.subjectStock index futuresen_US
dc.subjectStocks -- Prices -- Charts, diagrams, etcen_US
dc.subjectStock price forecastingen_US
dc.subjectSpeculationen_US
dc.subjectInvestment analysisen_US
dc.subjectEconomic forecastingen_US
dc.subjectStocksen_US
dc.titleOn the conditional forecast of the market risk premium and its economic significance from a long time series perspective
dc.typeDissertation
thesis.degree.departmentBusiness Administration
thesis.degree.disciplineBusiness Administration
thesis.degree.grantorTexas Tech University
thesis.degree.levelDoctoral
thesis.degree.namePh.D.

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