EXCESS RETURNS DETERMINATION - EMPIRICAL-EVIDENCE FROM CANADA

In an economy where agents are assumed to be risk averse, a risky asset will have to pay off a premium in order to be willingly held. What contributes to the risk associated with a given asset is therefore an important question since it will determine the excess return offered by that asset. In this paper, we look at the behavior of asset prices in Canada from firms continuously listed on the Toronto Stock Exchange between 1963:1 and 1988:4. To do so, we use the broader class of nonexpected utility functions generally attributed to Epstein and Zin (1989) and Weil (1988). The results obtained are generally favorable to the type of model proposed, even if they remain fairly imprecise and sensitive to the choice of instruments.