Skip to main content
SpringerLink
Log in

Non-linear Tradeoff between Risk and Return: A Regime-switching Multi-factor Framework

  • Conference paper
Modeling and Simulation in Engineering, Economics, and Management (MS 2013)

Part of the book series: Lecture Notes in Business Information Processing ((LNBIP,volume 145))

  • 1504 Accesses

Abstract

This study develops a multi-factor framework where not only the 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 established. The positive and significant tradeoff between return and risk is essentially observed during low volatility periods suggesting a procyclical risk aversion of investors. Different patterns for the risk premium dynamics in low and high volatility periods are obtained, both in risk prices and risk (conditional second moments) patterns.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 39.99
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 49.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Sharpe, W.: Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk. Journal of Finance 19(3), 425–442 (1964)

    MathSciNet  Google Scholar 

  2. Glosten, L., Jagannathan, R., Runkle, D.: On the relation between the expected value and the variance of the nominal excess return on stocks. Journal of Finance 48(5), 1779–1801 (1993)

    Article  Google Scholar 

  3. Merton, R.: An intertemporal asset pricing model. Econometrica 41(5), 867–888 (1973)

    Article  MathSciNet  MATH  Google Scholar 

  4. Goyal, A., Santa-Clara, P.: Idiosyncratic risk matters! Journal of Finance 58(3), 975–1008 (2003)

    Article  Google Scholar 

  5. Bollerslev, T.: Generalised autoregressive conditional heteroskedasticity. Journal of Econometrics 31(3), 307–327 (1986)

    Article  MathSciNet  MATH  Google Scholar 

  6. Leon, A., Nave, J., Rubio, G.: The relationship between risk and expected return in Europe. Journal of Banking and Finance 31(2), 495–512 (2007)

    Article  Google Scholar 

  7. Scruggs, J.: Resolving the puzzling intertemporal relation between the market risk premium and conditional market variance: A two-factor approach. Journal of Finance 53(2), 575–603 (1998)

    Article  Google Scholar 

  8. Whitelaw, R.: Stock market risk and return: an equilibrium approach. Review of Financial Studies 13(3), 521–547 (2000)

    Article  Google Scholar 

  9. Mayfield, S.: Estimating the market risk premium. Journal of Financial Economics 73(3), 867–887 (2004)

    Google Scholar 

  10. Campbell, J.Y., Cochrane, J.: Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behaviour. Journal of Political Economy 107(2), 205–251 (1999)

    Article  Google Scholar 

  11. Ghysels, E., Santa-Clara, P., Valkanov, R.: There is a risk–return trade-off after all. Journal of Financial Economics 76(3), 509–548 (2005)

    Article  Google Scholar 

  12. Bali, T., Engle, R.: The ICAPM with Dynamic Conditional Correlations. Journal of Monetary Economics 57(4), 377–390 (2010)

    Article  Google Scholar 

  13. Capiello, L., Fearnley, T.: International CAPM with Regime-Switching Parameters. In: FAME Research Paper Series rp17, International Center for Financial Asset Management and Engineering, Geneva, Switzerland. (2000)

    Google Scholar 

  14. Lundblad, C.: The risk-return trade-off in the long run: 1836-2003. Journal of Financial Economics 85(1), 123–150 (2007)

    Article  Google Scholar 

  15. Baba, Y., Engle, R., Kraft, D., Kroner, K.: Multivariate simultaneous generalized ARCH, Unpublished Working Paper (University of California at San Diego) (1990)

    Google Scholar 

  16. Bollerslev, T., Wooldridge, J.: Quasi-maximum likelihood estimation and inference in dynamic models with time-varying covariances. Econometric Reviews 11(2), 143–172 (1992)

    Article  MathSciNet  MATH  Google Scholar 

  17. Sarno, L., Valente, G.: The cost of carry model and regime shifts in stock index futures markets: An empirical investigation. The Journal of Futures Markets 20(7), 603–624 (2000)

    Article  Google Scholar 

  18. Kim, S.W., Lee, B.S.: Stock Returns, Asymmetric Volatility, Risk Aversion, and Business Cycle: Some New Evidence. Economic Inquiry 46(2), 131–148 (2008)

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Finance and Accounting Department, Universitat Jaume I, Avda. Sos Baynat s/n, E-12071, Castellon de l Planan, Spain

    Vicent Aragó & Enrique Salvador

Authors
  1. Vicent Aragó
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Enrique Salvador
    View author publications

    You can also search for this author in PubMed Google Scholar

Editor information

Editors and Affiliations

  1. Department of Finance and Accounting, University Jaume I, Castelló de la Plana, Spain

    María Ángeles Fernández-Izquierdo  & María Jesús Muñoz-Torres  & 

  2. Department of Business Administration and Marketing, University Jaume I, Castellón de la Plana, Spain

    Raúl León

Rights and permissions

Reprints and permissions

Copyright information

© 2013 Springer-Verlag Berlin Heidelberg

About this paper

Cite this paper

Aragó, V., Salvador, E. (2013). Non-linear Tradeoff between Risk and Return: A Regime-switching Multi-factor Framework. In: Fernández-Izquierdo, M.Á., Muñoz-Torres, M.J., León, R. (eds) Modeling and Simulation in Engineering, Economics, and Management. MS 2013. Lecture Notes in Business Information Processing, vol 145. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-38279-6_7

Download citation

  • DOI: https://doi.org/10.1007/978-3-642-38279-6_7

  • Publisher Name: Springer, Berlin, Heidelberg

  • Print ISBN: 978-3-642-38278-9

  • Online ISBN: 978-3-642-38279-6

  • eBook Packages: Computer ScienceComputer Science (R0)

Publish with us

Policies and ethics

Search

Navigation