Asset-pricing models and economic risk premia
By: Pierluigi Balduzzi and Cesare Robotti.
Contributors: Robotti, Cesare.; Federal Reserve Bank of Atlanta.
Series: Working paper series / Federal Reserve Bank of Atlanta ;; 2005-13; Working paper series (Federal Reserve Bank of Atlanta : Online) ;; 2005-13.
Publisher: Federal Reserve Bank of Atlanta
Published: 2005
Place of publication: [Atlanta, Ga.]
Language: eng
Format: Electronic resource
Subjects: Capital assets pricing model -- Mathematical models.
Description: "The risk premia assigned to economic (nontraded) risk factors can be decomposed into three  parts: (i) the risk premia on maximum-correlation portfolios mimicking the factors; (ii) (minus) the  covariance between the nontraded components of the candidate pricing kernel of a given model and the  factors; and (iii) (minus) the mispricing assigned by the candidate pricing kernel to the maximumcorrelation  mimicking portfolios. The first component is the same across asset-pricing models and is  typically estimated with little (absolute) bias and high precision. The second component, on the other  hand, is essentially arbitrary and can be estimated with large (absolute) biases and low precisions by  multi-beta models with nontraded factors. This second component is also sensitive to the criterion  minimized in estimation. The third component is estimated reasonably well, both for models with traded  and nontraded factors. We conclude that the economic risk premia assigned by multi-beta models with  nontraded factors can be very unreliable. Conversely, the risk premia on maximum-correlation portfolios  provide more reliable indications of whether a nontraded risk factor is priced. These results hold for both  the constant and the time-varying components of the factor risk premia."--Federal Reserve Bank of Atlanta web site.
Notes: Includes bibliographical references.
Title from PDF file as viewed on 12/12/2005.
Also available in print.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.