An Investigation Of The Risk And Return Relation At Long Horizons

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An Investigation Of The Risk And Return Relation At Long Horizons

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Paul Harrison
Harold H. Zhang

Abstract

This paper examines the relation between expected stock returns and their conditional volatility over different holding periods and across different states of the economy. Seminonparametric density estimation and Monte Carlo integration are used to obtain the expected returns and conditional volatility at various holding intervals. We uncover a significantly positive risk and return relation at long holding intervals, such as one and two years, which is nonexistent at short holding periods such as one month. We also show that the existing finding in the literature of a negative risk and return relation may be attributable to misspecification. © 2000 by the President and Fellows of Harvard College and the Massachusetts Institute of Technolog

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Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 81 (1999)
Issue (Month): 3 (August)
Pages: 399-408
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Handle: RePEc:tpr:restat:v:81:y:1999:i:3:p:399-408

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Thomas D. Tallarini, Jr. & Harold H. Zhang, 2005. "External habit and the cyclicality of expected stock returns," Finance and Economics Discussion Series 2005-27, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
Other versions:
- Thomas Tallarini & Harold Zhang, . "External Habit and the Cyclicality of Expected Stock Returns," GSIA Working Papers 1997-26, Carnegie Mellon University, Tepper School of Business. [Downloadable!]
- Thomas D. Tallarini, Jr. & Harold H. Zhang, 2005. "External Habit and the Cyclicality of Expected Stock Returns," Journal of Business, University of Chicago Press, vol. 78(3), pages 1023-1048, May. [Downloadable!]
Tim Bollerslev & Hao Zhou, 2003. "Volatility puzzles: a unified framework for gauging return-volatility regressions," Finance and Economics Discussion Series 2003-40, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
Turan Bali & Kamil Yilmaz, 2009. "The Intertemporal Relation between Expected Return and Risk on Currency," TÃSÄ°AD-KoÃ§ University Economic Research Forum Working Papers 0909, TUSIAD-Koc University Economic Research Forum, revised Nov 2009. [Downloadable!]
Hui Guo & Robert Savickas, 2005. "Idiosyncratic volatility, stock market volatility, and expected stock returns," Working Papers 2003-028, Federal Reserve Bank of St. Louis. [Downloadable!]
Other versions:
- Guo, Hui & Savickas, Robert, 2006. "Idiosyncratic Volatility, Stock Market Volatility, and Expected Stock Returns," Journal of Business & Economic Statistics, American Statistical Association, vol. 24, pages 43-56, January. [Downloadable!] (restricted)
Bent Jesper Christensen & Morten Ørregaard Nielsen, 2007. "The Effect of Long Memory in Volatility on Stock Market Fluctuations," CREATES Research Papers 2007-03, School of Economics and Management, University of Aarhus. [Downloadable!]
Other versions:
- Bent Jesper Christensen & Morten Ørregaard Nielsen, 2007. "The Effect of Long Memory in Volatility on Stock Market Fluctuations," The Review of Economics and Statistics, MIT Press, vol. 89(4), pages 684-700, 05. [Downloadable!] (restricted)
Eric Ghysels & Pedro Santa-Clara & Rossen Valkanov, 2003. "There is a Risk-Return Tradeoff After All," CIRANO Working Papers 2003s-26, CIRANO. [Downloadable!]
Other versions:
- Eric Ghysels & Pedro Santa-Clara & Rossen Valkanov, 2003. "There is a Risk-Return Tradeoff After All," University of California at Los Angeles, Anderson Graduate School of Management 1155, Anderson Graduate School of Management, UCLA. [Downloadable!]
- Eric Ghysels & Pedro Santa-Clara & Rossen Valkanov, 2004. "There is a Risk-Return Tradeoff After All," NBER Working Papers 10913, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
- Eric Ghysels & Pedro Santa-Clara & Rossen Valkanov, 2004. "There is a Risk-Return Tradeoff After All," CIRANO Working Papers 2004s-24, CIRANO. [Downloadable!]
Michael W. Brandt & Qiang Kang, 2002. "On the Relationship Between the Conditional Mean and Volatility of Stock Returns: A Latent VAR Approach," NBER Working Papers 9056, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)

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