Market Price of Risk Estimation : Does Distribution Matter?

This study re-examines the risk-return relation using a contemporaneous asset pricing model under various probability distribution functions that account for skewness and kurtosis effects in the data. Once these effects are taken into account a positive risk premium is established, suggesting that a failure to account for the effects of higher moments on the risk-return trade-off is the main reason for the mixed results documented in the literature. The best estimates are given by the skew generalized t distribution