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Risk–return trade-off in the pacific basin equity markets

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  • Cheng, Ai-Ru
  • Jahan-Parvar, Mohammad R.

Abstract

We conduct an empirical study of risk–return trade-off in fourteen Pacific basin equity markets using several volatility estimators, including five variants of GARCH class, equally weighted rolling window volatility, and mixed data sampling (MIDAS), as well as binormal GARCH (BiN-GARCH) model which allows for non-zero conditional skewness in returns. Our findings imply that the BiN-GARCH model, which allows for time-variation in the conditional skewness and market price of risk, captures the expected positive risk–return relationship in eleven out of fourteen markets studied. In comparison, symmetric skewness models such as MIDAS or GARCH variants fail to capture positive and statistically significant market price of risk estimates. These results provide support for the growing literature on the necessity of modeling conditional higher moments in financial research.

Suggested Citation

  • Cheng, Ai-Ru & Jahan-Parvar, Mohammad R., 2014. "Risk–return trade-off in the pacific basin equity markets," Emerging Markets Review, Elsevier, vol. 18(C), pages 123-140.
  • Handle: RePEc:eee:ememar:v:18:y:2014:i:c:p:123-140
    DOI: 10.1016/j.ememar.2014.01.004
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Frazier, David T. & Liu, Xiaochun, 2016. "A new approach to risk-return trade-off dynamics via decomposition," Journal of Economic Dynamics and Control, Elsevier, vol. 62(C), pages 43-55.
    2. Chen, Xiaoyu & Chiang, Thomas C., 2016. "Stock returns and economic forces—An empirical investigation of Chinese markets," Global Finance Journal, Elsevier, vol. 30(C), pages 45-65.
    3. repec:eee:jbfina:v:82:y:2017:i:c:p:1-19 is not listed on IDEAS
    4. repec:eee:quaeco:v:66:y:2017:i:c:p:275-293 is not listed on IDEAS

    More about this item

    Keywords

    Conditional variance and skewness; Intertemporal CAPM; Pacific basin equity markets; Risk–return trade-off;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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