There is a Risk-Return Tradeoff After All / Eric Ghysels, Pedro Santa-Clara, Rossen Valkanov.

Format:

Book

Author/Creator:

Ghysels, Eric, 1956-

Contributor:

National Bureau of Economic Research.

Santa-Clara, Pedro.

Valkanov, Rossen I. (Rossen Ivanov), 1973-

Series:

Working Paper Series (National Bureau of Economic Research) no. w10913.

NBER working paper series no. w10913

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2004.

Summary:

This paper studies the ICAPM intertemporal relation between the conditional mean and the conditional variance of the aggregate stock market return. We introduce a new estimator that forecasts monthly variance with past daily squared returns -- the Mixed Data Sampling (or MIDAS) approach. Using MIDAS, we find that there is a significantly positive relation between risk and return in the stock market. This finding is robust in subsamples, to asymmetric specifications of the variance process, and to controlling for variables associated with the business cycle. We compare the MIDAS results with tests of the ICAPM based on alternative conditional variance specifications and explain the conflicting results in the literature. Finally, we offer new insights about the dynamics of conditional variance.

Notes:

Print version record

November 2004.