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Risk-Return Trade-Off for European Stock Markets

  • Nektarios Aslanidis

    ()

    (Department of Economics, FCEE, University Rovira Virgili)

  • Charlotte Christiansen

    ()

    (Cyprus University of Technology)

  • Christos S. Savva

    ()

    (Aarhus University and CREATES)

This paper adopts dynamic factor models with macro-fi?nance predictors to revisit the intertemporal risk-return relation in ?five large European stock markets. We identify country specifi?c, Euro area, and global factors to determine the conditional moments of returns considering the role of higher-order moments as additional measures of risk. The preferred combination of factors varies across countries. In the linear model, there is a strong but negative relation between conditional returns and conditional volatility. A Markov switching model describes the risk-return trade-off well. A number of variables have explanatory power for the states of the European stock markets.

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Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2013-31.

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Length: 33
Date of creation: 29 Jul 2013
Date of revision:
Handle: RePEc:aah:create:2013-31
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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  1. Nyberg, Henri, 2012. "Risk-Return Tradeoff in U.S. Stock Returns over the Business Cycle," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(01), pages 137-158, April.
  2. Anderson, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Labys, Paul, 2002. "Modeling and Forecasting Realized Volatility," Working Papers 02-12, Duke University, Department of Economics.
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  7. Charlotte Christiansen & Maik Schmeling & Andreas Schrimpf, 2010. "A Comprehensive Look at Financial Volatility Prediction by Economic Variables," CREATES Research Papers 2010-58, School of Economics and Management, University of Aarhus.
  8. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January.
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  17. Amit Goyal & Ivo Welch, 2004. "A Comprehensive Look at the Empirical Performance of Equity Premium Prediction," Yale School of Management Working Papers amz2412, Yale School of Management, revised 01 Jan 2006.
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