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Is The Risk-Return Paradox Still Alive?

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Author Info
Manuel Cano Rodríguez ()
Manuel Núñez Nickel ()

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Abstract

To date, the validity of empirical Bowman’s paradox papers that employ mean-variance approach for testing the risk/return relationship are inherently unverifiable and their results cannot be generalized. However, this problem can be overcome by developing an econometric model with two fundamental characteristics. The first one is the use of a time series model for each firm, avoiding the traditional cross-sectional analysis. The other one is to estimate a model with a single variable (the firm rate of return), but whose expectation and variance are mathematically related according to behavioral theories hypotheses, forming a heterocedastic model similar to “GARCH”. Our results agree with behavioral theories and show that these theories can also be carry out with market measures.

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Paper provided by Universidad Carlos III, Departamento de Economía de la Empresa in its series Business Economics Working Papers with number wb024818.

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Date of creation: Oct 2002
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Handle: RePEc:cte:wbrepe:wb024818

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  1. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June. [Downloadable!] (restricted)
  2. Fiegenbaum, Avi, 1990. "Prospect theory and the risk-return association : An empirical examination in 85 industries," Journal of Economic Behavior & Organization, Elsevier, vol. 14(2), pages 187-203, October. [Downloadable!] (restricted)
  3. March, James G., 1988. "Variable risk preferences and adaptive aspirations," Journal of Economic Behavior & Organization, Elsevier, vol. 9(1), pages 5-24, January. [Downloadable!] (restricted)
  4. Gooding, Richard Z. & Goel, Sanjay & Wiseman, Robert M., 1996. "Fixed versus variable reference points in the risk-return relationship," Journal of Economic Behavior & Organization, Elsevier, vol. 29(2), pages 331-350, March. [Downloadable!] (restricted)
  5. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March. [Downloadable!] (restricted)
  6. John M. Abowd, 1990. "Does performance-based managerial compensation affect corporate performance?," Industrial and Labor Relations Review, ILR Review, ILR School, Cornell University, vol. 43(3), pages 52-73, February.
  7. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March. [Downloadable!] (restricted)
  8. Sinha, Tapen, 1994. "Prospect theory and the risk return association: Another look," Journal of Economic Behavior & Organization, Elsevier, vol. 24(2), pages 225-231, July. [Downloadable!] (restricted)
  9. Josef Lakonishok & Robert W. Vishny & Andrei Shleifer, 1993. "Contrarian Investment, Extrapolation, and Risk," NBER Working Papers 4360, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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