The risk-return tradeoff: A COGARCH analysis of Merton's hypothesis
AbstractWe analysed daily returns of the CRSP value weighted and equally weighted indices over 1953-2007 in order to test for Merton's theorised relationship between risk and return. Like some previous studies we used a GARCH stochastic volatility approach, employing not only traditional discrete time GARCH models but also using a COGARCH -- a newly developed continuous-time GARCH model which allows for a rigorous analysis of unequally spaced data. When a risk-return relationship symmetric to positive or negative returns is postulated, a significant risk premium of the order of 7-8% p.a., consistent with previously published estimates, is obtained. When the model includes an asymmetry effect, the estimated risk premium, still around 7% p.a., becomes insignificant. These results are robust to the use of a value weighted or equally weighted index. The COGARCH model properly allows for unequally spaced time series data. As a sidelight, the model estimates that, during the period from 1953 to 2007, the weekend is equivalent, in volatility terms, to about 0.3-0.5 regular trading days.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Empirical Finance.
Volume (Year): 18 (2011)
Issue (Month): 2 (March)
Contact details of provider:
Web page: http://www.elsevier.com/locate/jempfin
Continuous-time GARCH modelling Market risk Pseudo-maximum likelihood Risk free rate Risk premium Stochastic volatility;
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Wang, Jianxin & Yang, Minxian, 2013.
"On the risk return relationship,"
Journal of Empirical Finance,
Elsevier, vol. 21(C), pages 132-141.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If references are entirely missing, you can add them using this form.