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There is a Risk-Return Tradeoff After All

  • Eric Ghysels
  • Pedro Santa-Clara
  • Rossen Valkanov

This paper studies the ICAPM intertemporal relation between conditional mean and conditional variance of the aggregate stock market return. We introduce a new estimator that forecasts monthly variance with past daily squared returns - the Mixed Data Sampling (or MIDAS) approach. Using MIDAS, we find that there is a significantly positive relation between risk and return in the stock market. This finding is robust in subsamples, to asymmetric specifications of the variance process, and to controlling for variables associated with the business cycle. We compare the MIDAS results with other tests of the ICAPM based on alternative conditional variance specifications and explain the conflicting results in the literature. Finally, we offer new insights about the dynamics of conditional variance. Nous étudions le modèle ICAPM à l'aide d'un nouvel estimateur MIDAS, basé sur un mélange de données temporelles échantillonnées à différentes fréquences. Nous trouvons une relation positive et significative avec cet estimateur. Nous analysons également des modèles avec asymétries.

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Paper provided by CIRANO in its series CIRANO Working Papers with number 2003s-26.

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Length: 42 pages
Date of creation: 01 May 2003
Date of revision:
Handle: RePEc:cir:cirwor:2003s-26
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