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Market states and the risk-return tradeoff

Zijun Wang and M. Moosa Khan

The Quarterly Review of Economics and Finance, 2017, vol. 65, issue C, 314-327

Abstract: We re-examine the risk-return tradeoff in the U.S. equity market by allowing for time variation in the tradeoff and estimating conditional variance by the new mixed data sampling method. The main finding is that the risk-return tradeoff is strongly time-varying with the state of the market and the average of the time-varying tradeoff estimates is 1.43. The lagged market return is found to be the best indicator of market states. The empirical finding holds true for a battery of robustness checks during the post-Compustat sample period. The evidence from the international markets is similar to the U.S. one.

Keywords: Risk-return tradeoff; Time variation; Market states; Mixed data sampling (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:quaeco:v:65:y:2017:i:c:p:314-327