Regime Switches in the Risk-Return Trade-off

Eric Ghysels and Massimiliano Marcellino
Authors registered in the RePEc Author Service: Pierre Guérin

No 9698, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper deals with the estimation of the risk-return trade-off. We use a MIDAS model for the conditional variance and allow for possible switches in the risk-return relation through a Markov-switching specification. We find strong evidence for regime changes in the risk-return relation. This finding is robust to a large range of specifications. In the first regime characterized by low ex-post returns and high volatility, the risk-return relation is reversed, whereas the intuitive positive risk-return trade-off holds in the second regime. The first regime is interpreted as a "flight-to-quality" regime.

Keywords: Markov-switching; Midas; Risk-return trade-off; Conditional variance (search for similar items in EconPapers)
JEL-codes: G10 G12 (search for similar items in EconPapers)
Date: 2013-10
New Economics Papers: this item is included in nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Regime switches in the risk–return trade-off (2014)
Working Paper: Regime Switches in the Risk-Return Trade-Off (2013)
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