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Patrizia Perras

Patrizia Perras

is research assistant at the Finance and Financial Control Research Group and PhD candidate at the Department of Business Administration and Economics at the University of Passau, Germany. She earned a M.Sc. in Accounting, Finance and Taxation from the same institution in 2015. Her field of research is primarily related to dynamic asset pricing, capital markets and risk management.

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Patrizia Perras, Niklas Wagner: Asset pricing with distinct premia for trading and non-trading risk

This paper investigates the intertemporal relation between expected returns and conditional variance and its link to periodic trading breaks on the aggregate stock market. We consider a model that merges two different processes driving asset prices, (i) a continuous process that models diffusive risk during the trading day and, (ii) a discontinuous process that captures random overnight price changes. Based on this framework, we construct a modified version of Merton's (1973) intertemporal asset pricing model that considers distinct premia for trading and non-trading risk. Model estimation results reveal that both, trading risk as well as the risk of jumps due to overnight price changes, are crucial in explaining the expected market risk premium. Most notable, market price of risk estimates differ significantly for diffusive trading volatility and random overnight jumps. Only overnight jumps carry a positive market price of risk and contribute to observing a positive intertemporal risk-return trade-off. Overall, the findings indicate that exchange closures are usually accompanied by a sharp increase in investors' risk aversion resulting in a higher premium demanded by investors to hold the market portfolio overnight.

Last modified: 2019.09.24.