The risk-return tradeoff in international stock markets: one-step multivariate GARCH-M estimation with many assets

Geert Dhaene, Piet Sercu and Jianbin Wu

No 544332, Working Papers Department of Accountancy, Finance and Insurance (AFI), Leuven from KU Leuven, Faculty of Economics and Business (FEB), Department of Accountancy, Finance and Insurance (AFI), Leuven

Abstract: We study international asset pricing in a large-dimensional multivariate GARCH-in-mean framework. We examine different estimation methods and find that the two-step estimation method proposed by Bali and Engle (2010) tends to underestimate the risk-return coefficient and the corresponding standard error. We also show that the estimate is improved by one-step estimation and by increasing the cross-sectional dimension. Using stock index returns for up to 24 countries and 4 major currencies in the period 2001-2015, one-step estimation gives a market risk-return coefficient of around 6. The estimate is robust to variations in model specification, data frequency, and the number of stock markets considered.

Date: 2016-06
New Economics Papers: this item is included in nep-fmk and nep-rmg
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Published in Discussion paper series, DPS16.13 pages:1-26

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Working Paper: The risk-return tradeoff in international stock markets: one-step multivariate GARCH-M estimation with many assets (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ete:afiper:544332

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