Financial Volatility and TimeVarying Risk Premia
(1997) In Lund Economic Studies 69. Abstract
 This thesis consists of four empirical essays, all dealing with return volatility of financial assets and/or timevarying risk premia.
In the first essay, Changing Risk Premia: Evidence from a Small Open Economy, the relation between risk and return is investigated for Swedish stocks. Little is known about the differences in the riskreturn relationship in large economies compared with smaller, less studied, markets. In the paper, Sweden is used as a representative for small open economies. The price of risk on the Swedish stock market is estimated using a conditional asset pricing model that allows for timevariation in the risk. The results of the econometric analysis show that the estimates of the price of risk are... (More)  This thesis consists of four empirical essays, all dealing with return volatility of financial assets and/or timevarying risk premia.
In the first essay, Changing Risk Premia: Evidence from a Small Open Economy, the relation between risk and return is investigated for Swedish stocks. Little is known about the differences in the riskreturn relationship in large economies compared with smaller, less studied, markets. In the paper, Sweden is used as a representative for small open economies. The price of risk on the Swedish stock market is estimated using a conditional asset pricing model that allows for timevariation in the risk. The results of the econometric analysis show that the estimates of the price of risk are invariably positive and significant, and that there are only minor differences in the preferences towards risk of representative investors in small and large economies.
The second essay, TimeVarying Risk Premia in Swedish Treasury Bonds, models timevarying risk premia at the long end of the Swedish term structure using a GARCHM approach. Two measures of risk are used to model the premia; the conditional variance of the excess holding return, and the conditional covariance with the market portfolio return. The results show that there is evidence of timevarying risk premia of a conditional CAPM type in excess holding period returns of Swedish treasury bonds. Furthermore, it is found that the estimated premia can be of substantial magnitude during periods of great uncertainty.
In the third essay, Forecasting Variance Using Stochastic Volatility and GARCH, various GARCH and stochastic volatility specifications are compared with respect to their insample characteristics and their ability to accurately predict volatility, using daily Swedish OMXindex returns. The analysis shows that the stochastic volatility models are superior to the GARCH/EGARCH models in their ability to capture the features of the data, and that the asymmetric and seasonal effects are important. The forecasting ability of the models is evaluated using a bootstrap technique for forecast horizons between 2 and 100 days. The main result is that the stochastic volatility models produce significantly more accurate volatility forecasts than the GARCH/EGARCH models, but that there are only minor differences between the various stochastic volatility specifications.
The fourth essay, Stochastic Volatility and the Estimation of Short Term Interest Rate Dynamics, estimates a twofactor stochastic volatility model for the defaultfree shortterm interest rate, using Euromarket data for eight different currencies. The results show that there is a highly persistent stochastic volatility component present in the shortterm interest rate which is captured by the model. In addition, there is evidence of a level effect in the volatility of the short rate, i.e. that the volatility of the short term interest rate depends on the level of the short rate itself. The twofactor model clearly outperforms a model that only allows for a level effect, in terms of its ability to capture the features of the data. Furthermore, the twofactor model gives theoretical call option values that can differ substantially from those obtained by other models. This is especially true for shortmaturity outofthemoney options. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/record/29637
 author
 Hördahl, Peter ^{LU}
 supervisor
 opponent

 Professor Berglund, Tom, Svenska Handelshögskolan i Helsingfors
 organization
 publishing date
 1997
 type
 Thesis
 publication status
 published
 subject
 keywords
 Monte Carlo methods, Term structure of interest rates, Asymmetric variance, Timevarying risk premia, Volatility forecasting, CAPM, Conditional asset pricing models, Stochastic volatility, Volatility modeling, GARCH, Bond option pricing, Financial science, Finansiering
 in
 Lund Economic Studies
 volume
 69
 pages
 153 pages
 publisher
 Department of Economics, Lund Universtiy
 defense location
 Room 135, EC1
 defense date
 19971114 10:15:00
 external identifiers

 other:ISRN: LUSADG/SANA97/1051SE
 ISSN
 04600029
 language
 English
 LU publication?
 yes
 id
 c1f69ad956dc4740b490e317a321c670 (old id 29637)
 date added to LUP
 20160401 15:55:55
 date last changed
 20190521 16:17:49
@phdthesis{c1f69ad956dc4740b490e317a321c670, abstract = {This thesis consists of four empirical essays, all dealing with return volatility of financial assets and/or timevarying risk premia.<br/><br> <br/><br> In the first essay, Changing Risk Premia: Evidence from a Small Open Economy, the relation between risk and return is investigated for Swedish stocks. Little is known about the differences in the riskreturn relationship in large economies compared with smaller, less studied, markets. In the paper, Sweden is used as a representative for small open economies. The price of risk on the Swedish stock market is estimated using a conditional asset pricing model that allows for timevariation in the risk. The results of the econometric analysis show that the estimates of the price of risk are invariably positive and significant, and that there are only minor differences in the preferences towards risk of representative investors in small and large economies.<br/><br> <br/><br> The second essay, TimeVarying Risk Premia in Swedish Treasury Bonds, models timevarying risk premia at the long end of the Swedish term structure using a GARCHM approach. Two measures of risk are used to model the premia; the conditional variance of the excess holding return, and the conditional covariance with the market portfolio return. The results show that there is evidence of timevarying risk premia of a conditional CAPM type in excess holding period returns of Swedish treasury bonds. Furthermore, it is found that the estimated premia can be of substantial magnitude during periods of great uncertainty.<br/><br> <br/><br> In the third essay, Forecasting Variance Using Stochastic Volatility and GARCH, various GARCH and stochastic volatility specifications are compared with respect to their insample characteristics and their ability to accurately predict volatility, using daily Swedish OMXindex returns. The analysis shows that the stochastic volatility models are superior to the GARCH/EGARCH models in their ability to capture the features of the data, and that the asymmetric and seasonal effects are important. The forecasting ability of the models is evaluated using a bootstrap technique for forecast horizons between 2 and 100 days. The main result is that the stochastic volatility models produce significantly more accurate volatility forecasts than the GARCH/EGARCH models, but that there are only minor differences between the various stochastic volatility specifications.<br/><br> <br/><br> The fourth essay, Stochastic Volatility and the Estimation of Short Term Interest Rate Dynamics, estimates a twofactor stochastic volatility model for the defaultfree shortterm interest rate, using Euromarket data for eight different currencies. The results show that there is a highly persistent stochastic volatility component present in the shortterm interest rate which is captured by the model. In addition, there is evidence of a level effect in the volatility of the short rate, i.e. that the volatility of the short term interest rate depends on the level of the short rate itself. The twofactor model clearly outperforms a model that only allows for a level effect, in terms of its ability to capture the features of the data. Furthermore, the twofactor model gives theoretical call option values that can differ substantially from those obtained by other models. This is especially true for shortmaturity outofthemoney options.}, author = {Hördahl, Peter}, issn = {04600029}, language = {eng}, publisher = {Department of Economics, Lund Universtiy}, school = {Lund University}, series = {Lund Economic Studies}, title = {Financial Volatility and TimeVarying Risk Premia}, volume = {69}, year = {1997}, }