Persistence in the market risk premium: evidence across countries

Abstract

This paper provides evidence on the degree of persistence of one of the key components of the CAPM, namely the market risk premium, as well as its volatility. The analysis applies fractional integration methods to data for the US, Germany and Japan, and for robustness purposes considers different time horizons (2, 5 and 10 years) and frequencies (monthly and weekly). The empirical findings in most cases imply that the market risk premium is a highly persistent variable which can be characterized as a random walk process, whilst its volatility is less persistent and exhibits stationary long-memory behaviour. There is also evidence that in the case of the US the degree of persistence has changed as a results of various events; this is confirmed by both endogenous break tests and the associated subsample estimates. Market participants should take this evidence into account when designing their investment strategies.

Credit-to-GDP ratios – non-linear trends and persistence: evidence from 44 OECD economies

“…Assaf (2007) investigates the long memory in the Middle East and North African equity markets returns and volatility. Caporale et al (2018) apply fractional integration methods to analyse the statistical properties of Emerging Market Bond Index, while Caporale et al (2021b) replicate the latter for European stock market indices. Unlike them, we study the persistence of private credit-to-GDP through the evidence provided from 44 OECD economies in a potential nonlinear framework.…”

Effect of COVID-19 on ETF and index efficiency: evidence from an entropy-based analysis

“…Studies that examine ETF efficiency in the context of Efficient Market Hypothesis usually employ traditional econometric methodologies such as regression and cointegration (Xu et al 2017(Xu et al , 2019Huang et al 2021). However, irregularities such as long memory, self-similarity and other non-linear phenomenon have also been reported in financial time series data of ETFs and equity indices (Zhu and Bao 2019;Saha et al 2020;Caporale et al 2020).…”