There is a Risk-Return Tradeoff After All

Eric Ghysels (), Pedro Santa-Clara and Rossen Valkanov

No 10913, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: G1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin
Date: 2004-11
Note: AP
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Related works:
Working Paper: There is a Risk-Return Tradeoff After All (2003)
Working Paper: There is a Risk-Return Tradeoff After All (2004)
Working Paper: There is a Risk-Return Tradeoff After All (2003)
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