Location of Repository

What is the Shape of the Risk-Return Relation? †

By Alberto Rossi and Allan Timmermann

Abstract

Using a novel and flexible regression approach that avoids imposing restrictive modeling assumptions, we find evidence of a nonmonotonic relation between conditional volatility and expected stock market returns. At low and medium levels of conditional volatility there is a positive risk-return trade-off, but this relation is inverted at high levels of volatility. This finding helps explain the absence of a consensus in the empirical literature on the sign of the risk-return trade-off. We propose a new measure of risk based on the conditional covariance between observations of a broad economic activity index and stock market returns. Using this broader covariancebased risk measure, we find clear evidence of a positive and monotonic risk-return trade-off

Topics: risk-return trade-off. Stock market volatility. Covariance risk. Boosted regression trees. Consumpti
Year: 2010
OAI identifier: oai:CiteSeerX.psu:10.1.1.194.276
Provided by: CiteSeerX
Download PDF:
Sorry, we are unable to provide the full text but you may find it at the following location(s):
  • http://citeseerx.ist.psu.edu/v... (external link)
  • http://rady.ucsd.edu/faculty/d... (external link)
  • Suggested articles


    To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.