#2001-001C "Uncovering the Risk-Return Relation in the Stock Market"
by Hui Guo, and Robert Whitelaw
January 2001
Revised April 2005

There is an ongoing debate about the apparent weak or negative relation between risk (conditional variance) and expected returns in the aggregate stock market. We develop and estimate an empirical model based on the ICAPM that separately identifies the two components of expected returns—the risk component and the component due to the desire to hedge changes in investment opportunities. More...

PUBLISHED: Journal of Finance, June 2006, 61(3), pp. 1433-63

#2000-031C "Limited Stock Market Participation and Asset Prices in a Dynamic Economy"
by Hui Guo
November 2000
Revised August 2003

We present a consumption-based model that explains the equity premium puzzle through two channels. First, because of borrowing constraints, the shareholder cannot completely diversify his income risk and requires a sizable risk premium on stocks. Second, because of limited stock market participation, the precautionary saving demand lowers the risk-free rate but not stock return and generates a substantial liquidity premium. More...

PUBLISHED: Journal of Financial and Quantitative Analysis, September 2004, 39(3), pp. 495-516