The Relationship between Risk and Expected Return in Europe

Ángel León Valle (), Juan Nave Pineda () and Gonzalo Rubio Irigoyen ()
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Ángel León Valle: UNIVERSITY OF ALICANTE
Juan Nave Pineda: UNIVERSITY OF ALICANTE UNIVERSITY OF CASTILLA-LA MANCHA UNIVERSITY OF THE BASQUE COUNTRY
Gonzalo Rubio Irigoyen: UNIVERSITY OF CASTILLA LA-MANCHA UNIVERSITY OF THE BASQUE COUNTRY

No 201025, Working Papers from Fundacion BBVA / BBVA Foundation

Abstract: We employ MIDAS (Mixed Data Sampling) to study the risk-expected return trade-off in several European stock indices. Using MIDAS, we report that, in most indices, there is a significant and positive relationship between risk and expected return. This strongly contrasts with the result we obtain when we employ both symmetric and asymmetric GARCH models for conditional variance. We also find that asymmetric specifications of the variance process within the MIDAS framework improve the relationship between risk and expected return. Finally, we introduce bivariate MIDAS and find some evidence of significant pricing of the hedging component for the intertemporal riskreturn trade-off.

Keywords: Risk-return trade-off; hedging component; MIDAS; conditional variance. (search for similar items in EconPapers)
Pages: 46
Date: 2005-12
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