Estimating the Equity Risk Premium in a NAGARCH Model

Summary

The document asks whether the equity risk premium, denoted by lambda, can be estimated alongside the parameters returned when fitting an fGARCH model with a NAGARCH submodel in R. The stated motivation is to construct a pricing-measure specification in which the risk-adjusted gamma parameter is formed from lambda and the estimated gamma.

No answer, estimation procedure, or results are included, so the document does not establish whether the software supports joint estimation or how lambda should be identified. It highlights a modeling issue at the intersection of conditional volatility and the change from a real-world measure to a pricing measure. Readers would need additional sources to determine the appropriate likelihood, restrictions, and estimation workflow for their specific model.

Key ideas

• The question concerns estimating an equity risk premium parameter alongside NAGARCH volatility parameters.
• The intended pricing-measure adjustment relates the risk premium to the gamma parameter.
• The document gives no solution or evidence about software support for estimating lambda.
• Identifiability and estimation details require further model-specific information.

Tags

# How to estimate lambda from NAGARCH submodel in R


# How to estimate lambda from NAGARCH submodel in R












I am trying to estimate the model="fGARCH", submodel="NAGARCH" from the rugarch package in R.

However, when I am estimating the parameters, only omega, alpha, beta and gamma are returned. Is it possible to estimate the equity risk premium, lambda, as well?

I need this for the Q measure where gamma*=lambda+gamma.

Best regards

August

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.