Is the risk-return paradox still alive?
To date, the validity of empirical Bowman's paradox papers that employ mean-variance approach for testing the risk/return relationship are inherently unverifiable and their results cannot be generalized. However, this problem can be overcome by developing an econometric model with two fundamental characteristics. The first one is the use of a time series model for each firm, avoiding the traditional cross-sectional analysis. The other one is to estimate a model with a single variable (the firm rate of return), but whose expectation and variance are mathematically related according to behavioral theories hypotheses, forming a heterocedastic model similar to "GARCH". Our results agree with behavioral theories and show that these theories can also be carry out with market measures.
|Date of creation:||Oct 2002|
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References listed on IDEAS
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- Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
- Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W, 1994.
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- Fiegenbaum, Avi, 1990. "Prospect theory and the risk-return association : An empirical examination in 85 industries," Journal of Economic Behavior & Organization, Elsevier, vol. 14(2), pages 187-203, October.
- Nickel, Manuel Núñez & Rodriguez, Manuel Cano, 2002. "A review of research on the negative accounting relationship between risk and return: Bowman's paradox," Omega, Elsevier, vol. 30(1), pages 1-18, February.
- repec:sae:ilrrev:v:43:y:1990:i:3:p:52-73 is not listed on IDEAS
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- Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
- Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
- Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
- Sinha, Tapen, 1994. "Prospect theory and the risk return association: Another look," Journal of Economic Behavior & Organization, Elsevier, vol. 24(2), pages 225-231, July. Full references (including those not matched with items on IDEAS)
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