Regime switches in the risk–return trade-off

Eric Ghysels, Pierre Guérin and Massimiliano Marcellino

Journal of Empirical Finance, 2014, vol. 28, issue C, 118-138

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: Risk–return trade-off; Markov-switching; MIDAS; Conditional variance (search for similar items in EconPapers)
JEL-codes: G10 G12 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (35)

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Related works:
Working Paper: Regime Switches in the Risk-Return Trade-Off (2013)
Working Paper: Regime Switches in the Risk-Return Trade-off (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:28:y:2014:i:c:p:118-138

DOI: 10.1016/j.jempfin.2014.06.007

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