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Long-run risk-return trade-offs

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  • Bandi, Federico M.
  • Perron, Benoît

Abstract

Excess market returns are correlated with past market variance. This dependence is statistically mild at short horizons (thereby leading to a hard-to-detect risk-return trade-off, as in the existing literature) but increases with the horizon and is strong in the long run (i.e., between 6 and 10 years). From an econometric standpoint, we find that the long-run predictive power of past market variance is robust to the statistical properties of long-horizon stock-return predictive regressions. From an economic standpoint, we show that, when conditioning on past market variance, conditional versions of the traditional CAPM and consumption-CAPM yield considerably smaller cross-sectional pricing errors than their unconditional counterparts.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 143 (2008)
Issue (Month): 2 (April)
Pages: 349-374

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Handle: RePEc:eee:econom:v:143:y:2008:i:2:p:349-374

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Web page: http://www.elsevier.com/locate/jeconom

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References

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Citations

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Cited by:
  1. Federico M. Bandi & Bernard Perron & Andrea Tamoni & Claudio Tebaldi, 2014. "The scale of predictability," Working Papers 509, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  2. Gonzalo, Jesus & Pitarakis, Jean-Yves, 2010. "Regime specific predictability in predictive regressions," Discussion Paper Series In Economics And Econometrics 0916, Economics Division, School of Social Sciences, University of Southampton.
  3. Sévi, Benoît, 2013. "An empirical analysis of the downside risk-return trade-off at daily frequency," Economic Modelling, Elsevier, vol. 31(C), pages 189-197.
  4. Federico M. Bandi & Roberto Reno, 2009. "Nonparametric Stochastic Volatility," Global COE Hi-Stat Discussion Paper Series gd08-035, Institute of Economic Research, Hitotsubashi University.
  5. Jensen, Mark J & Maheu, John M, 2013. "Risk, Return and Volatility Feedback: A Bayesian Nonparametric Analysis," MPRA Paper 52132, University Library of Munich, Germany.

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