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The Risk-Return Relation in International Stock Markets

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  • Hui Guo
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Abstract

We investigate the risk-return relation in international stock markets using realized variance constructed from MSCI (Morgan Stanley Capital International) daily stock price indices. In contrast with the capital asset pricing model, realized variance by itself provides negligible information about future excess stock market returns; however, we uncover a positive and significant risk-return tradeoff in many countries after controlling for the (U.S.) consumption-wealth ratio. U.S. realized variance is also significantly related to future international stock market returns; more importantly, it always subsumes the information content of its local counterparts. Our results indicate that stock market variance is an important determinant of the equity premium. Copyright 2006, The Eastern Finance Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6288.2006.00157.x
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Bibliographic Info

Article provided by Eastern Finance Association in its journal Financial Review.

Volume (Year): 41 (2006)
Issue (Month): 4 (November)
Pages: 565-587

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Handle: RePEc:bla:finrev:v:41:y:2006:i:4:p:565-587

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Web page: http://www.easternfinance.org/
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Cited by:
  1. Thomas Nitschka, 2007. "Cashflow news, the value premium and an asset pricing view on European stock market integration," IEW - Working Papers 339, Institute for Empirical Research in Economics - University of Zurich.
  2. Han, Yufeng, 2012. "State uncertainty in stock markets: How big is the impact on the cost of equity?," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2575-2592.
  3. Nitschka, Thomas, 2014. "Developed markets’ business cycle dynamics and time-variation in emerging markets’ asset returns," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 76-82.
  4. Nitschka, Thomas, 2013. "The impact of (global) business cycle risk on the German and British stock markets: Evidence from the first age of globalization," Review of Financial Economics, Elsevier, vol. 22(3), pages 118-124.

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