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Risk-return trade-off and serial correlation: Do volume and volatility matter?

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  • Kinnunen, Jyri

Abstract

I investigate a relation between the conditional mean and variance of the aggregate stock return using a model that allows the relevance of the risk-return trade-off and autocorrelation to change over time. The model detects a positive risk-return relation, but the importance of the risk-return relation fluctuates with the level of information flow, measured by volatility. During low-volatility periods, market-wide persistence in returns increases, leading to a failure of the pure risk-return explanation for expected returns. This offers an explanation as to why detection of a positive risk-return trade-off has been challenging, while autocorrelation has been a robust finding.

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  • Kinnunen, Jyri, 2014. "Risk-return trade-off and serial correlation: Do volume and volatility matter?," Journal of Financial Markets, Elsevier, vol. 20(C), pages 1-19.
  • Handle: RePEc:eee:finmar:v:20:y:2014:i:c:p:1-19
    DOI: 10.1016/j.finmar.2014.04.003
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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. Naqi Shah, Sadia & Qayyum, Abdul, 2016. "Analyse Risk-Return Paradox: Evidence from Electricity Sector of Pakistan," MPRA Paper 85528, University Library of Munich, Germany.
    3. Kinnunen, Jyri & Martikainen, Minna, 2015. "Expected returns and idiosyncratic risk: Industry-level evidence from Russia," BOFIT Discussion Papers 30/2015, Bank of Finland, Institute for Economies in Transition.
    4. repec:bof:bofitp:urn:nbn:fi:bof-201511231444 is not listed on IDEAS
    5. Fredj Jawadi & Waël Louhichi & Abdoulkarim Idi Cheffou & Rivo Randrianarivony, 2016. "Intraday jumps and trading volume: a nonlinear Tobit specification," Review of Quantitative Finance and Accounting, Springer, vol. 47(4), pages 1167-1186, November.
    6. Kinnunen, Jyri, 2013. "Dynamic return predictability in the Russian stock market," Emerging Markets Review, Elsevier, vol. 15(C), pages 107-121.
    7. repec:eee:phsmap:v:482:y:2017:i:c:p:181-188 is not listed on IDEAS
    8. Kinnunen, Jyri, 2017. "Dynamic cross-autocorrelation in stock returns," Journal of Empirical Finance, Elsevier, vol. 40(C), pages 162-173.

    More about this item

    Keywords

    ICAPM; Risk-return trade-off; Volume; Volatility; Autocorrelation;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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