The intertemporalcapitalassetpricingmodelwithdynamic conditionalcorrelations

The intertemporalcapitalassetpricingmodelof Merton(1973) is examinedusingthe dynamicconditionalcorrelation(DCC)modelof Engle (2002). Themean-revertingDCC modelisusedtoestimateastock’s(portfolio’s)conditionalcovariancewiththemarket and testwhethertheconditionalcovariancepredictstime-variationinthestock’s (portfolio’s)expectedreturn.Therisk-aversioncoefficient,restrictedtobethesame acrossassetsinpanelregression,isestimatedtobebetweentwoandfourandhighly significant.Theriskpremiuminducedbytheconditionalcovariationofassetswiththe marketportfolioremainspositiveandsignificantaftercontrollingforriskpremia inducedbyconditionalcovariationwithmacroeconomic,financial,andvolatility factors.