Revisiting the relationship between risk and return

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

The literature on the fundamental relationship between risk and return is largely inconclusive. We show that accounting for structural breaks and utilizing a large sample is required for correctly estimating this risk-return tradeoff within the GARCH framework. The above two factors affect the risk-return tradeoff via volatility persistence, a parameter totally ignored in the current debate. We show this with the help of Monte Carlo simulations and then validate our results empirically using US stock market data. The results have important economic implications and will help in resolving some inconsistencies in the literature.

Original languageEnglish (US)
Pages (from-to)25-40
Number of pages16
JournalReview of Quantitative Finance and Accounting
Volume44
Issue number1
DOIs
StatePublished - Jan 2013
Externally publishedYes

Keywords

  • GARCH
  • Risk
  • Structural breaks
  • Volatility

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting(all)
  • Finance

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