Journal of Banking & Finance Vol. 31 No. 6 2007
Testing for negative expected market return premia
Abstract
This paper tests the hypothesis that the expected return premium on the market portfolio is always non-negative. A violation of this lower bound restriction provides evidence against a broad class of risk-based equilibrium models in favor of bubble behavior. Our tests utilize information variables, identified in prior literature, that predict time variation in market return premia. We employ out-of-sample forecasts and bootstraps generated with parameters that are consistent with non-negativity but closest to the estimated parameters. We find statistically reliable evidence against non-negativity for the excess return on the value-weighted market index. The most negative out-of-sample prediction was −2.01% in September 1973.
- DOI
- 10.1016/j.jbankfin.2006.08.005
- Volume
- 31
- Issue
- 6
- Pages
- 1755-1770
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib