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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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File URL: ftp://ftp.econ.au.dk/creates/rp/13/rp13_31.pdf
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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. Charlotte Christiansen & Maik Schmeling & Andreas Schrimpf, 2012. "A comprehensive look at financial volatility prediction by economic variables," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 27(6), pages 956-977, 09.
  2. Sydney C. Ludvigson & Serena Ng, 2005. "The Empirical Risk-Return Relation: A Factor Analysis Approach," NBER Working Papers 11477, National Bureau of Economic Research, Inc.
  3. 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.
  4. Eric Ghysels & Pedro Santa-Clara & Rossen Valkanov, 2004. "There is a Risk-Return Tradeoff After All," NBER Working Papers 10913, National Bureau of Economic Research, Inc.
  5. Robert C. Merton, 1980. "On Estimating the Expected Return on the Market: An Exploratory Investigation," NBER Working Papers 0444, National Bureau of Economic Research, Inc.
  6. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September.
  7. Schrimpf, Andreas & Wang, Qingwei, 2010. "A reappraisal of the leading indicator properties of the yield curve under structural instability," International Journal of Forecasting, Elsevier, vol. 26(4), pages 836-857, October.
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