On the risk return relationship

Wang, J; Yang, M

On the risk return relationship

Wang, J Yang, M

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Publication Type:: Journal Article
Citation:: Journal of Empirical Finance, 2013, 21 (1), pp. 132 - 141
Issue Date:: 2013-03-01

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Field	Value	Language
dc.contributor.author	Wang, J	en_US
dc.contributor.author	Yang, M	en_US
dc.date.issued	2013-03-01	en_US
dc.identifier.citation	Journal of Empirical Finance, 2013, 21 (1), pp. 132 - 141	en_US
dc.identifier.issn	0927-5398	en_US
dc.identifier.uri	http://hdl.handle.net/10453/23448
dc.description.abstract	While the risk return trade-off theory suggests a positive relationship between the expected return and the conditional volatility, the volatility feedback theory implies a channel that allows the conditional volatility to negatively affect the expected return. We examine the effects of the risk return trade-off and the volatility feedback in a model where both the return and its volatility are influenced by news arrivals. Our empirical analysis shows that the two effects have approximately the same size with opposite signs for the daily excess returns of seven major developed markets. For the same data set, we also find that a linear relationship between the expected return and the conditional standard deviation is preferable to polynomial-type nonlinear specifications. Our results have a potential to explain some of the mixed findings documented by previous studies. © 2013 Elsevier B.V.	en_US
dc.relation.ispartof	Journal of Empirical Finance	en_US
dc.relation.isbasedon	10.1016/j.jempfin.2013.01.001	en_US
dc.subject.classification	Finance	en_US
dc.title	On the risk return relationship	en_US
dc.type	Journal Article
utslib.citation.volume	1	en_US
utslib.citation.volume	21	en_US
utslib.for	1402 Applied Economics	en_US
utslib.for	1403 Econometrics	en_US
utslib.for	1502 Banking, Finance and Investment	en_US
dc.location.activity	Gold Coast, Qld
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Finance Discipline
utslib.copyright.status	closed_access
pubs.issue	1	en_US
pubs.publication-status	Published	en_US
pubs.volume	21	en_US

Abstract:

While the risk return trade-off theory suggests a positive relationship between the expected return and the conditional volatility, the volatility feedback theory implies a channel that allows the conditional volatility to negatively affect the expected return. We examine the effects of the risk return trade-off and the volatility feedback in a model where both the return and its volatility are influenced by news arrivals. Our empirical analysis shows that the two effects have approximately the same size with opposite signs for the daily excess returns of seven major developed markets. For the same data set, we also find that a linear relationship between the expected return and the conditional standard deviation is preferable to polynomial-type nonlinear specifications. Our results have a potential to explain some of the mixed findings documented by previous studies. © 2013 Elsevier B.V.

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http://hdl.handle.net/10453/23448