The non-linear trade-off between return and risk: a regime-switching multi-factor framework

John Cotter and Enrique Salvador
Additional contact information
Enrique Salvador: Smurfit School of Business,University of California

No 201414, Working Papers from Geary Institute, University College Dublin

Abstract: This study develops a multi-factor framework where not only market risk is considered but also potential changes in the investment opportunity set. Although previous studies find no clear evidence about a positive and significant relation between return and risk, favourable evidence can be obtained if a non-linear relation is pursued. The positive and significant risk-return trade-off is essentially observed during low volatility periods. However, this relationship is not obtained during periods of high volatility. Also, different patterns for the risk premium dynamics in low and high volatility periods are obtained both in prices of risk and market risk dynamics.

Keywords: Non-linear risk-return trade-off; Pro-cyclical risk aversion; Regime-Switching GARCH; multi-factor model; Risk premium (search for similar items in EconPapers)
JEL-codes: G10 G12 G15 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2014-11-06
New Economics Papers: this item is included in nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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http://www.ucd.ie/geary/static/publications/workingpapers/gearywp201414.pdf First version, 2014 (application/pdf)

Related works:
Working Paper: The non-linear trade-off between return and risk: a regime-switching multi-factor framework (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ucd:wpaper:201414

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