TY - JOUR
T1 - Re-examining the risk-return relationship in Europe
T2 - Linear or non-linear trade-off?
AU - Salvador, Enrique
AU - Floros, Christos
AU - Arago, Vicent
PY - 2014
Y1 - 2014
N2 - This paper analyzes the risk-return trade-off in Europe using recent data from 11 European stock markets. After relaxing the linear assumptions in the risk-return relationship by introducing a new approach that considers the current state of the market, we obtain significant evidence for a positive risk-return trade-off for low volatility states. However, this finding is reduced or even non-significant during periods of high volatility. Maintaining the linear assumption over the risk-return trade-off leads to non-significant estimations for all cases. These results are robust across countries despite the conditional volatility model used. These results also demonstrate that the inconclusive results in previous studies may be due to strong linear assumptions when modeling the risk-return trade-off. This previous research fails to uncover the global behavior of the relationship between return and risk.
AB - This paper analyzes the risk-return trade-off in Europe using recent data from 11 European stock markets. After relaxing the linear assumptions in the risk-return relationship by introducing a new approach that considers the current state of the market, we obtain significant evidence for a positive risk-return trade-off for low volatility states. However, this finding is reduced or even non-significant during periods of high volatility. Maintaining the linear assumption over the risk-return trade-off leads to non-significant estimations for all cases. These results are robust across countries despite the conditional volatility model used. These results also demonstrate that the inconclusive results in previous studies may be due to strong linear assumptions when modeling the risk-return trade-off. This previous research fails to uncover the global behavior of the relationship between return and risk.
KW - Non-linear risk-return tradeoff
KW - Pro-cyclical risk aversion
KW - Regime-Switching GARCH
KW - Regime-Switching MIDAS
KW - Risk premium
UR - http://www.scopus.com/inward/record.url?scp=84902960740&partnerID=8YFLogxK
U2 - 10.1016/j.jempfin.2014.05.004
DO - 10.1016/j.jempfin.2014.05.004
M3 - Article
AN - SCOPUS:84902960740
SN - 0927-5398
VL - 28
SP - 60
EP - 77
JO - Journal of Empirical Finance
JF - Journal of Empirical Finance
ER -