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Revisiting the intertemporal risk-return relation: asymmetrical effect of unexpected volatility shocks

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  • Kiseok Nam
  • Joshua Krausz
  • Augustine C. Arize

Abstract

We suggest that an unexpected volatility shock is an important risk factor to induce the intertemporal relation, and the conflicting findings on the relation could be attributable to an omitting variable bias resulting from ignoring the effect of an unexpected volatility shock on the relation. With the effect of an unexpected volatility shock incorporated in estimation, we find a strong positive intertemporal relation for the US monthly excess returns for 1926:12-2008:12. We also find a significant link between the asymmetric mean-reversion and the intertemporal relation in that the quicker reversion of negative returns is attributed to the negative intertemporal relation under a prior negative return shock.

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  • Kiseok Nam & Joshua Krausz & Augustine C. Arize, 2014. "Revisiting the intertemporal risk-return relation: asymmetrical effect of unexpected volatility shocks," Quantitative Finance, Taylor & Francis Journals, vol. 14(12), pages 2193-2203, December.
    • Handle: RePEc:taf:quantf:v:14:y:2014:i:12:p:2193-2203
    DOI: 10.1080/14697688.2013.783226
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