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Intertemporal risk–return relationships in bull and bear markets

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  • Wu, Shue-Jen
  • Lee, Wei-Ming

Abstract

This paper examines whether the intertemporal risk–return relationship in the U.S. stock market varies with bull and bear markets. Based on the non-parametric Bry–Boschan approach for identifying bull and bear markets and the non-parametric Bartlett-kernel based realized variance as a proxy for the conditional variance, our empirical findings reveal that the risk–return relationship is significantly positive in bull markets, but significantly negative in bear markets. Even when the macroeconomic variables reflecting business cycle fluctuations are taken into account, these empirical results remain the same. The rolling regression results also reveal that our findings are quite robust over time; in particular, the range of the rolling estimates is much smaller, suggesting that the time-varying risk–return relationship can be appropriately explained by bull and bear markets.

Suggested Citation

  • Wu, Shue-Jen & Lee, Wei-Ming, 2015. "Intertemporal risk–return relationships in bull and bear markets," International Review of Economics & Finance, Elsevier, vol. 38(C), pages 308-325.
  • Handle: RePEc:eee:reveco:v:38:y:2015:i:c:p:308-325
    DOI: 10.1016/j.iref.2015.03.008
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    Cited by:

    1. repec:eee:eneeco:v:68:y:2017:i:c:p:53-65 is not listed on IDEAS
    2. 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.
    3. repec:eee:reveco:v:51:y:2017:i:c:p:157-173 is not listed on IDEAS
    4. Beladi, Hamid & Chao, Chi Chur & Hu, May, 2016. "A macro-analysis of financial decisions: An examination of special dividend announcements," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 162-181.
    5. repec:eee:jbfina:v:82:y:2017:i:c:p:1-19 is not listed on IDEAS
    6. repec:eee:quaeco:v:66:y:2017:i:c:p:275-293 is not listed on IDEAS

    More about this item

    Keywords

    Bear market; Bull market; Realized variance; Risk–return;

    JEL classification:

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

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