TY  - JOUR
AU  - Giovannini,Alberto
AU  - Jorion,Philippe
TI  - The Time-Variation of Risk and Return in the Foreign Exchange and Stock Markets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 2573
PY  - 1989
Y2  - November 1989
UR  - http://www.nber.org/papers/w2573
L1  - http://www.nber.org/papers/w2573.pdf
N1  - Author contact info:
Alberto Giovannini
Unifortune Asset Management
Via Donizetti 53
20122 Milano, Italy
E-Mail: alberto.giovannini@alum.mit.edu

Philippe Jorion
University of California, Irvine
Department of Finance
Graduate School of Management
Irvine, CA  92697
E-Mail: pjorion@gsm.uci.edu
AB  - Recent empirical work indicates that, in a variety of financial markets, both conditional expectations and conditional variances of returns are time- varying. The purpose of this paper is to determine whether these joint fluctuations of conditional first and second moments are consistent with the Sharpe-Lintner-Mossin capital-asset-pricing model. We test the mean-variance model under several different assumptions about the time-variation of conditional second moments of returns, using weekly data from July 1974 to December 1986, that include returns on a portfolio composed of dollar, Deutsche mark, Sterling, and Swiss franc assets, together with the US stock market. The model is estimated constraining risk premia to depend on the time-varying conditional covariance matrix of the residuals of the expected returns equations. The results indicate that estimated conditional variances cannot explain the observed time-variation of risk premia. Furthermore, the constraints imposed by the static CAPH are always rejected.
ER  -