Abstract
This study develops a multi-factor framework where not only the market risk is considered but also potential changes in the investment opportunity set. Although previous studies find no clear evidence about a positive and significant relation between return and risk, favourable evidence can be obtained if a non-linear relation is established. The positive and significant tradeoff between return and risk is essentially observed during low volatility periods suggesting a procyclical risk aversion of investors. Different patterns for the risk premium dynamics in low and high volatility periods are obtained, both in risk prices and risk (conditional second moments) patterns.KeywordsRisk premiumICAPMpro-cyclical risk aversionnon-linear multivariate GARCHintertemporal risk
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