Risk, Return and Volatility Feedback: A Bayesian Nonparametric Analysis

In this paper, we let the data speak for itself about the existence of volatility feedback and the often debated risk–return relationship. We do this by modeling the contemporaneous relationship between market excess returns and log-realized variances with a nonparametric, infinitely-ordered, mixture representation of the observables’ joint distribution. Our nonparametric estimator allows for deviation from conditional Gaussianity through …