Author : Alberto G. P. Rossi
Publisher :
ISBN 13 :
Total Pages : 58 pages
Book Rating : 4.:/5 (129 download)
Book Synopsis What is the Shape of the Risk-Return Relation? by : Alberto G. P. Rossi
Download or read book What is the Shape of the Risk-Return Relation? written by Alberto G. P. Rossi and published by . This book was released on 2010 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: Using a flexible econometric approach that avoids imposing restrictive modeling assumptions, we find evidence of a non-monotonic relation between conditional volatility and expected stock market returns: At low-to-medium levels of conditional volatility there is a positive trade-off between risk and expected returns, but this relationship gets inverted at high levels of volatility as observed during the recent financial crisis. We propose a new measure of risk based on the conditional covariance between daily observations of a broad economic activity index and stock returns. Using this covariance measure, we find clear evidence of a monotonically increasing risk-return trade-off. Our finding of a non-monotonic mean-volatility relation helps explain the absence of a consensus in the empirical literature on the sign of the risk-return trade-off. At the same time, our finding that the expected return is a monotonically rising function of the conditional covariance measure also suggests that a positive risk-return relation can be established once a better measure of risk is used.