Abstract

We …nd that the estimation of the market expected return bene…ts signi…cantly from enriching the information set we use, with increasingly …ner detail regarding the shape of the physical and risk-neutral distributions and the shape discrepancy between the two. Assuming the existence of a monotonic projected pricing kernel we extend Duan and Zhang’s (2014) theoretical model to a general system of equations that relates physical cumulants of any order to risk-neutral ones through the projected relative risk aversion coe¢ cient. Using stock and option data from the S&P 500 index we employ our general speci…cation to estimate the ex-ante market risk premium for the period 2001-2010 in a monthly frequency. The empirical results strongly support our hypothesis both in a statistical sense and in the context of the present value identity that associates dividend-price ratio to expected returns and dividend growth rates.

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