THE WORLD EX ANTE RISK PREMIUM - AN EMPIRICAL-INVESTIGATION

A number of recent papers have focused on testing the linearity restri ctions implied by international asset pricing models. The tests, howev er, have not addressed an additional restriction implied by the models ; namely, that the risk premium on the world portfolio is positive. Th is study provides a direct assessment of this restriction. The evidenc e indicates that the ex ante world market risk premium can be negative . The results are robust to market proxies that are hedged and unhedge d with respect to currency risk. Subperiod analysis indicates that the rejection of the positive risk premium restriction is driven by the f irst half of the sample period. (C) 1998 Elsevier Science Ltd. All rig hts reserved.