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Risk-Return Trade-Off for European Stock Markets

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  • Nektarios Aslanidis

    () (Department of Economics, FCEE, University Rovira Virgili)

  • Charlotte Christiansen

    () (Cyprus University of Technology)

  • Christos S. Savva

    () (Aarhus University and CREATES)

Abstract

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.

Suggested Citation

  • Nektarios Aslanidis & Charlotte Christiansen & Christos S. Savva, 2013. "Risk-Return Trade-Off for European Stock Markets," CREATES Research Papers 2013-31, Department of Economics and Business Economics, Aarhus University.
  • Handle: RePEc:aah:create:2013-31
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Risk-return trade-off; Dynamic factor model; Markov switching; Macro-?nance predictors; Higher order moments;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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