IDEAS home Printed from https://ideas.repec.org/a/adi/ijbess/v7y2025i2p319-323.html
   My bibliography  Save this article

The intertemporal relationship between downside risks and expected stock returns: Evidence from time-varying transition probability models

Author

Listed:
  • Samuel Tabot Enow

    (The IIE Varsity college, Durban, South Africa)

Abstract

The increasing inter relationship between financial markets have led to the discovery of new risk dynamics particularly when considering downside risk. Recent advances in econometric modelling have prompted the search for new insights into the intertemporal dynamics between downside risks and expected stock returns. Therefore, the aim of this study was to investigate this relationship in the S&P 500, the FTSE 100, the DAX, the Nikkei 225, and the TSX Composite, covering the period from January 2000 to December 2023. Using a time-varying transition probability model, the findings revealed consistent negative correlations between downside risk measures and expected returns across all markets, with CVaR exhibiting stronger inverse relationships compared to VaR. These findings challenge the classical risk-return trade-off but align with behavioural explanations where heightened risk aversion during downturns suppresses returns. The regime-switching analysis further uncovers asymmetry in transition probabilities where high-risk regimes persist with a 74% probability, while low-risk regimes show greater stability. By implication, this study provides empirical support for regulatory frameworks prioritizing tail risk mitigation, particularly in volatile markets. Key Words:Downside Risk; Expected Return; Scaling Behaviour; Time-Varying Transition Probability Models; Value-at-Risk; Conditional Value-at-Risk

Suggested Citation

  • Samuel Tabot Enow, 2025. "The intertemporal relationship between downside risks and expected stock returns: Evidence from time-varying transition probability models," International Journal of Business Ecosystem & Strategy (2687-2293), Bussecon International Academy, vol. 7(2), pages 319-323, April.
  • Handle: RePEc:adi:ijbess:v:7:y:2025:i:2:p:319-323
    DOI: 10.36096/ijbes.v7i2.790
    as

    Download full text from publisher

    File URL: https://www.bussecon.com/ojs/index.php/ijbes/article/view/790/446
    Download Restriction: no

    File URL: https://doi.org/10.36096/ijbes.v7i2.790
    Download Restriction: no

    File URL: https://libkey.io/10.36096/ijbes.v7i2.790?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:adi:ijbess:v:7:y:2025:i:2:p:319-323. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Umit Hacioglu (email available below). General contact details of provider: https://edirc.repec.org/data/ibihutr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.