Decomposition of Time-Varying Risk Premia in Equity Markets

The determinants of the market price of risk have received considerable attention in finance literature. For a riskless asset, nominal return is certain and the default risk of the asset is negligible. On the contrary, expected return of a risky asset either depends on market and firm conditions as in the example of stock return, or asset has default risk. The focus of this study is equity market with its peculiar risk premium. Default risk and its premium is beyond our scope.