Revisiting the relationship between risk and return

Revisiting the relationship between risk and return The literature on the fundamental relationship between risk and return is largely inconclusive. We show that accounting for structural breaks and utilizing a large sample is required for correctly estimating this risk-return tradeoff within the GARCH framework. The above two factors affect the risk-return tradeoff via volatility persistence, a parameter totally ignored in the current debate. We show this with the help of Monte Carlo simulations and then validate our results empirically using US stock market data. The results have important economic implications and will help in resolving some inconsistencies in the literature. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Revisiting the relationship between risk and return

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Publisher
Springer US
Copyright
Copyright © 2013 by Springer Science+Business Media New York
Subject
Economics / Management Science; Finance/Investment/Banking; Accounting/Auditing; Econometrics; Operations Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-013-0397-1
Publisher site
See Article on Publisher Site

Abstract

The literature on the fundamental relationship between risk and return is largely inconclusive. We show that accounting for structural breaks and utilizing a large sample is required for correctly estimating this risk-return tradeoff within the GARCH framework. The above two factors affect the risk-return tradeoff via volatility persistence, a parameter totally ignored in the current debate. We show this with the help of Monte Carlo simulations and then validate our results empirically using US stock market data. The results have important economic implications and will help in resolving some inconsistencies in the literature.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Aug 22, 2013

References

  • The Intertemporal relation between expected returns and risk
    Bali, TG
  • Modelling structural breaks, long memory and stock market volatility: an overview
    Banerjee, A; Urga, G
  • Simple technical trading rules and the stochastic properties of stock returns
    Brock, W; Lakonishok, J; LeBaron, B
  • Volatility persistence and stock valuations: some empirical evidence using GARCH
    Chou, R

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