The Impact of global financial market uncertainty on the risk-return relation in the stock markets of G7 countries

Purpose: This paper aims to investigate the effect of global financial market uncertainty on the relation between risk and return in G7 stock markets. Design/methodology/approach: Market uncertainty is quantified using a probability-based measure derived from a regime-switching model in which the state transition probabilities are time-varying in response to leading economic indicators. Time variation in the risk return relation is estimated using a GARCH-M model. Findings: While the regime-switching model successfully distinguishes between crisis and normal states, there remains substantial variability through time in the level of uncertainty about which state prevails. Results show that a strong negative relation exists between this uncertainty and the reward-to-variability ratio across all G7 stock markets. This finding is qualitatively consistent at both monthly and weekly horizons. Originality/value: Extant evidence on the risk-return relation is conflicting. Most papers assume the relation is time constant. Allowing the reward-to-variability ratio to vary through time in response to return regime uncertainty increases the understanding of asset pricing. It also has important implications for asset allocation decisions by investors.22 page(s

What do ADRs tell us about international arbitrage and market integration?

13 page(s

Does the choice of news restrictions in GARCH based systematic risk measures matter?

40 page(s

Is the risk-return relation positive? Further evidence from a stochastic volatility in mean approach

Existing evidence on the relation between risk and return is conflicting. This evidence is extended by estimating a stochastic volatility in mean model using equity returns from a mix of ten emerging and five developed markets. Results suggest that while the relation is significantly positive for China and significantly negative for Australia, it is insignificant for the remaining markets studied. Findings also vary across subperiods related to the Asian financial crisis of 1997 to 1998. Model estimates identify some important differences across these markets in the nature of volatility in terms of its own volatility, persistence and predictability.

Financial risk exposures in the airline industry : evidence from Australia and New Zealand

Important financial risks facing the airline industry include interest-rate, currency and fuel-price risk. This paper estimates the exposure to these risks within the airline industry of Australia and New Zealand, using both linear and non-linear specifications, for a variety of horizon lengths. Evidence for exposure, both symmetric and asymmetric, tends to strengthen as the return horizon is lengthened. Exposure to these financial risks is largely unchanged by the terrorist attacks and the collapse of a major competitor in September 2001.22 page(s

Editorial : Impact of global recession on financial markets : introduction and overview (Afro-Asian journal of finance and accounting)

2 page(s

Is volatility risk priced after all? Some disconfirming evidence

Recent theory and evidence from US studies suggest that aggregate market volatility risk is a strong candidate for inclusion in the list of risk factors that earn a risk premium in equilibrium. We re-examine the sensitivity of stock returns to volatility risk using delta-neutral index option straddles to proxy for innovations in aggregate volatility. Contrary to existing US evidence, our analysis finds little evidence that volatility risk is priced in Australian equities. This finding is robust across a variety of methods for characterizing the underlying volatility factor.