The time-varying risk–return trade-off and its explanatory and predictive factors

Nuria Alemany, Vicent Aragó and Enrique Salvador

The North American Journal of Economics and Finance, 2023, vol. 68, issue C

Abstract: We analyze the intertemporal dimension of the risk–return trade-off and determine the drivers that better explain and predict its evolution. To this end, we propose a novel estimate of the relationship between return and risk where we generate time variation in the trade-off without conditioning the estimates to any state variable. We compare this dynamic approach with time-invariant or state-dependent estimates and observe that our dynamic method reasonably aligns with the constant (state dependent) methods but it offers a much broader picture of the risk–return trade-off. We also link its evolution to a set of macroeconomic, systematic and sentiment or uncertainty risk factors. We find that the risk–return relationship is positive during expansionary periods but it decreases during recessionary periods where occasionally even turns out negative. Our main conclusions hold for the consideration of hedging components, different MV-GARCH models or window lengths and several proxies of market returns and risk.

Keywords: Risk-return trade-off; Participation effect; Flight-to-safety; Macroeconomic factors; Systematic factors; Sentiment factors (search for similar items in EconPapers)
JEL-codes: G10 G12 G19 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1062940823000761
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:68:y:2023:i:c:s1062940823000761

DOI: 10.1016/j.najef.2023.101953

Access Statistics for this article

The North American Journal of Economics and Finance is currently edited by Hamid Beladi

More articles in The North American Journal of Economics and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().