The Time-Varying Risk Return Tradeoff in the Long-Run

Research output: Working paper

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Abstract

Lundblad(2007,JFE) shows that the risk-return tradeoff is unequivocally positive with a two-century history of equity market data. However, a further examination of the relation with the UK monthly stock returns from 1836 to 2010 produce still weak risk-return relation. I show that the risk-return relation is mostly positive but varies considerably over time based on a new nonlinear ICAPM with multivariate GARCH-M terms with the time-varying risk-return tradeoffs and hedging coefficients. The often observed negative risk-return relation is statistically insignificant with the 95% confidence bounds. The hedging coefficients also vary significantly across time with negative signs. This complex nonlinearity seems to be the main culprit of the weak risk-return relation.
Original languageEnglish
Number of pages32
Publication statusPublished - Jun 2012

Publication series

NameSSRN
PublisherSSRN
No.1969848

Keywords

  • Time-varying Risk-Return Tradeoff and Hedging Coefficient, ICAPM

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