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A fresh look at the risk-return tradeoff

Cindy S.H. Wang, Yi-Chi Chen and Hsin-Yu Lo

Pacific-Basin Finance Journal, 2021, vol. 68, issue C

Abstract: This research takes a different approach to examining the international risk-return tradeoff nexus from an econometrician's viewpoint. We study this tradeoff based on returns from 28 countries, covering a wide range of advanced and emerging markets. In contrast to the existing literature, we conduct panel data analysis that allows for cross-sectional dependence, along with the fixed-effects pooled OLS method that can produce consistent estimators. Empirical results show that the proposed approach could be a practical guide for investment portfolio, because of (i) the positive risk-return relation for both advanced and emerging economies, especially when it is associated with the business cycle, and (ii) the convincing out-of-sample forecasts by the fixed-effects pooled panel predictions.

Keywords: Risk-return tradeoff; Cross-correlation CD test; Business cycle; Fixed-effects pooled OLS estimation; Out-of-sample forecast (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.pacfin.2021.101546

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