The relationship between stock returns and volatility in the seventeen largest international stock markets: A semi-parametric approach

Dimitrios Dimitriou () and Theodore Simos ()

MPRA Paper from University Library of Munich, Germany

Abstract: We empirically investigate the relationship between expected stock returns and volatility in the twelve EMU countries as well as five major out of EMU international stock markets. The sample period starts from December 1992 until December 2007 i.e. up to the recent financial crisis. Empirical results in the literature are mixed with regard to the sign and significance of the mean – variance tradeoff. Based on parametric GARCH in mean models we find a weak relationship between expected returns and volatility for most of the markets. However, using a flexible semi-parametric specification for the conditional variance, we unravel significant evidence of a negative relationship in almost all markets. Furthermore, we investigate a related issue, the asymmetric reaction of volatility to positive and negative shocks in stock returns confirming a negative asymmetry in all markets.

Keywords: Risk-return tradeoff; international stock markets; semi-parametric specification of conditional variance (search for similar items in EconPapers)
JEL-codes: F15 F21 G11 (search for similar items in EconPapers)
Date: 2011-01
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Citations: View citations in EconPapers (6)

Published in Modern Economy 2.1(2011): pp. 1-8

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