The Time-Variation of Risk and Return in the Foreign Exchange and Stock Markets

39 Pages Posted: 19 Jul 2010

See all articles by Alberto Giovannini

Alberto Giovannini

Columbia University - Columbia Business School

Philippe Jorion

University of California, Irvine - Paul Merage School of Business

Date Written: May 1988

Abstract

Recent empirical work indicates that, in a variety of financial markets, both conditional expectations and conditional variances of returns are time- varying. The purpose of this paper is to determine whether these joint fluctuations of conditional first and second moments are consistent with the Sharpe-Lintner-Mossin capital-asset-pricing model. We test the mean-variance model under several different assumptions about the time-variation of conditional second moments of returns, using weekly data from July 1974 to December 1986, that include returns on a portfolio composed of dollar, Deutsche mark, Sterling, and Swiss franc assets, together with the US stock market. The model is estimated constraining risk premia to depend on the time-varying conditional covariance matrix of the residuals of the expected returns equations. The results indicate that estimated conditional variances cannot explain the observed time-variation of risk premia. Furthermore, the constraints imposed by the static CAPH are always rejected.

Suggested Citation

Giovannini, Alberto and Jorion, Philippe, The Time-Variation of Risk and Return in the Foreign Exchange and Stock Markets (May 1988). NBER Working Paper No. w2573, Available at SSRN: https://ssrn.com/abstract=1640415

Alberto Giovannini (Contact Author)

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Philippe Jorion

University of California, Irvine - Paul Merage School of Business ( email )

Campus Drive
Irvine, CA 92697-3125
United States
949-824-5245 (Phone)
949-824-8469 (Fax)

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