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The Relationship between Volatility and Expected Returns: Some Evidence for Australia

Author

Listed:
  • Ali F. Darrat

    (College of Business, Louisiana Tech University, Ruston, U.S.A.)

  • Bin Li

    (Griffith Business School, Griffith University, Australia)

  • Omar Benkato

    (Miller College of Business, Ball State University, U.S.A.)

Abstract

We explore the intertemporal relation between the conditional mean and the conditional variance of industry portfolio returns and the Fama-French 25 size/book-to-market portfolio returns using data from Australia. We estimate the portfolio conditional covariance with the market and test whether it can predict the time-variation in the portfolio expected returns. We find strong and consistent evidence of a positive risk aversion relation, implying that the market returns do carry a positive risk premium in the Australian market. Our results suggest that the value factor is relevant for determining the variation of asset returns on both the industry portfolios and the size/book-to-market portfolios.

Suggested Citation

  • Ali F. Darrat & Bin Li & Omar Benkato, 2011. "The Relationship between Volatility and Expected Returns: Some Evidence for Australia," International Journal of Business and Economics, College of Business and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 10(1), pages 27-43, April.
  • Handle: RePEc:ijb:journl:v:10:y:2011:i:1:p:27-43
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    References listed on IDEAS

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    Cited by:

    1. Auer, Benjamin R., 2013. "Can habit formation under complete market integration explain the cross-section of international equity risk premia?," Review of Financial Economics, Elsevier, vol. 22(2), pages 61-67.

    More about this item

    Keywords

    risk-return trade-offs; volatility models; ICAPM; Australian market;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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