Abstract
The stock returns generating process is analysed using alternative specifications of the autoregressive conditional heteroscedasticity model. Empirical anaylysis using monthly data from the Finnish stock market shows a clearly significant persistence of volatility of stock prices.In addition,The presence of a time-varying risk premium in the stock returns is also clearly supported by the data. This suggests a cautious attitude towards traditional, standard empirical analysis of capital markets, which is based on the assumption of time-invariant risk premiums. The results obtained do not support the view that the risk premiums have increased during the 1980s, when instability has been the main characteristic of most financial markets.