Risks, Volume 7, Issue 4 (December 2019) – 26 articles
Cover Story (view full-size image): The figure illustrates our proposal of a two-step procedure to assess the riskiness of long-term stock returns in excess of different benchmarks, such as the short- and long-term interest rate, the earnings-by-price ratio, and inflation. First, we estimate the conditional mean function using a fully-nonparametric smoother. Second, we take the squared residuals from step one and estimate the conditional variance function again with a local-linear technique. We find that the homoscedastic historical average gives an adequate approximation of the unobserved conditional variance for both the one-year and five-year horizon.View this paper.
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