caa a22 4500 378913840 CHVBK 20180305123548.0 cr unu---uuuuu 161128e20040301xx s 000 0 eng 10.2202/1558-3708.1141 doi (NATIONALLICENCE)gruyter-10.2202/1558-3708.1141 Inferring the Forward Looking Equity Risk Premium from Derivative Prices [Elektronische Daten] [Ramaprasad Bhar, Carl Chiarella, Wolfgang J. Runggaldier] This paper considers the measurement of the equity risk premium in financial markets from a new perspective that picks up on a suggestion from Merton (1980) to use implied volatility of options on a market portfolio as a direct ‘ex-ante’ estimate for market variance, and hence the risk premium. Here the time variation of the unobserved risk premium is modelled by a system of stochastic differential equations connected by arbitrage arguments between the spot equity market, the index futures and options on index futures. We motivate and analyse a mean-reverting form for the dynamics of the risk premium. Since the risk premium is not directly observable, information about its time varying conditional distribution is extracted using an unobserved component state space formulation of the system and Kalman filtering methodology. In order to cater for the time variation of volatility we use the option implied volatility in the dynamic equations for the index and its derivatives. This quantity is in a sense treated as a signal that impounds the market’s ‘ex-ante’, forward looking, view on the equity risk premium. The results using monthly U.S. market data over the period January 1995 to June 2003 are presented and the model fit is found to be statistically significant using a number of measures. Comparisons with ex-post returns indicate that such historical measures may be understating the market risk premium. ©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston Bhar Ramaprasad The University of New South Wales, R.Bhar@unsw.edu.au aut Chiarella Carl University of Technology, Sydney, Australia, carl.chiarella@uts.edu.au aut Runggaldier Wolfgang J. University of Padova, Italy, runggal@math.unipd.it aut Studies in Nonlinear Dynamics & Econometrics De Gruyter 8/1(2004-03-01) 8:1 2004 8 snde https://doi.org/10.2202/1558-3708.1141 text/html Onlinezugriff via DOI 1 research article jats NATIONALLICENCE 856 40 https://doi.org/10.2202/1558-3708.1141 text/html Onlinezugriff via DOI NATIONALLICENCE 700 1- Bhar Ramaprasad The University of New South Wales, R.Bhar@unsw.edu.au aut NATIONALLICENCE 700 1- Chiarella Carl University of Technology, Sydney, Australia, carl.chiarella@uts.edu.au aut NATIONALLICENCE 700 1- Runggaldier Wolfgang J. University of Padova, Italy, runggal@math.unipd.it aut NATIONALLICENCE 773 0- Studies in Nonlinear Dynamics & Econometrics De Gruyter 8/1(2004-03-01) 8:1 2004 8 snde CC0 http://creativecommons.org/publicdomain/zero/1.0 nationallicence BK010053 XK010053 XK010000 NATIONALLICENCE NATIONALLICENCE NL-gruyter