The literature documents that low stock returns are associated with increased volatility, but two competing explanations have proved difficult to disentangle. A negative return increases leverage making equity value more volatile. However, volatility feedback increases the risk premium when a...

In this article, I first extend the standard unobserved-component time series model to include Hamilton's Markov-switching heteroscedasticity. This will provide an alternative to the unobserved-component model with autoregressive conditional heteroscedasticity, as developed by Harvey, Ruiz, and...

The main econometric issue in testing the Lucas (1973) hypothesis in a time series context is estimation of the forecast-error variance conditional on past information. The conditional variance may vary through time as monetary policy evolves and agents are obliged to infer its present state....