How Important is Asymmetric Covariance for the Risk Premium of International Assets?

Document Type

Article

Publication Date

8-2008

Abstract

This paper empirically investigates the importance of asymmetric conditional covariance when computing the risk premium of international assets. Conditional second moment asymmetry of equity indices is significant and varies over time. The risk premia estimated allowing for asymmetry are statistically and economically different from risk premia estimated without allowing for asymmetry. In particular, an international investor who ignores covariance asymmetry overestimates required returns for equities of the G4 countries and for the world market, on average.

Journal Title

Journal of Banking and Finance

Journal ISSN

0378-4266

Volume

32

Issue

8

First Page

1636

Last Page

1647

Digital Object Identifier (DOI)

10.1016/j.jbankfin.2007.11.017

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