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Market states and the risk-return tradeoff

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  • Wang, Zijun
  • Khan, M. Moosa

Abstract

We re-examine the risk-return tradeoff in the U.S. equity market by allowing for time variation in the tradeoff and estimating conditional variance by the new mixed data sampling method. The main finding is that the risk-return tradeoff is strongly time-varying with the state of the market and the average of the time-varying tradeoff estimates is 1.43. The lagged market return is found to be the best indicator of market states. The empirical finding holds true for a battery of robustness checks during the post-Compustat sample period. The evidence from the international markets is similar to the U.S. one.

Suggested Citation

  • Wang, Zijun & Khan, M. Moosa, 2017. "Market states and the risk-return tradeoff," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 314-327.
    • Handle: RePEc:eee:quaeco:v:65:y:2017:i:c:p:314-327
    DOI: 10.1016/j.qref.2016.10.001
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    More about this item

    Keywords

    Risk-return tradeoff; Time variation; Market states; Mixed data sampling;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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