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Dimitra Kyriakopoulou, UCLouvain Print
Thursday, 26 April 2018, 12:15 - 13:15

Dimitra Kyriakopoulou, UCLouvain

Exponential-type GARCH Models with Linear-in-variance Risk Premium

Abstract: One of the implications of the intertemporal capital asset pricing model (CAPM) is that the risk premium of the market portfolio is a linear function of its variance. Yet, estimation theory of classical GARCH-in-mean models with linear-in-variance risk premium requires strong assumptions and is incomplete. We show that exponential-type GARCH models such as EGARCH or Log-GARCH are more natural in dealing with linear-in-variance risk premia. For the popular and more difficult case of EGARCH-in-mean, we derive conditions for the existence of a unique stationary and ergodic solution and invertibility following a stochastic recurrence equation approach. We then show consistency and asymptotic normality of the quasi maximum likelihood estimator under weak moment assumptions. An empirical application estimates the dynamic risk premia of a variety of stock indices using both EGARCH-M and Log-GARCH-M models. 

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