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Risk–return trade-off in the pacific basin equity markets

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  • Cheng, Ai-Ru
  • Jahan-Parvar, Mohammad R.
Abstract
We conduct an empirical study of risk–return trade-off in fourteen Pacific basin equity markets using several volatility estimators, including five variants of GARCH class, equally weighted rolling window volatility, and mixed data sampling (MIDAS), as well as binormal GARCH (BiN-GARCH) model which allows for non-zero conditional skewness in returns. Our findings imply that the BiN-GARCH model, which allows for time-variation in the conditional skewness and market price of risk, captures the expected positive risk–return relationship in eleven out of fourteen markets studied. In comparison, symmetric skewness models such as MIDAS or GARCH variants fail to capture positive and statistically significant market price of risk estimates. These results provide support for the growing literature on the necessity of modeling conditional higher moments in financial research.

Suggested Citation

  • Cheng, Ai-Ru & Jahan-Parvar, Mohammad R., 2014. "Risk–return trade-off in the pacific basin equity markets," Emerging Markets Review, Elsevier, vol. 18(C), pages 123-140.
    • Handle: RePEc:eee:ememar:v:18:y:2014:i:c:p:123-140
    DOI: 10.1016/j.ememar.2014.01.004
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    Cited by:

    1. Liu, Xiaochun, 2017. "Can macroeconomic dynamics explain the time variation of risk–return trade-offs in the U.S. financial market?," The Quarterly Review of Economics and Finance, Elsevier, vol. 66(C), pages 275-293.
    2. Frazier, David T. & Liu, Xiaochun, 2016. "A new approach to risk-return trade-off dynamics via decomposition," Journal of Economic Dynamics and Control, Elsevier, vol. 62(C), pages 43-55.
    3. Liu, Jingzhen, 2019. "Impacts of lagged returns on the risk-return relationship of Chinese aggregate stock market: Evidence from different data frequencies," Research in International Business and Finance, Elsevier, vol. 48(C), pages 243-257.
    4. Chen, Xiaoyu & Chiang, Thomas C., 2016. "Stock returns and economic forces—An empirical investigation of Chinese markets," Global Finance Journal, Elsevier, vol. 30(C), pages 45-65.
    5. Liu, Xiaochun, 2017. "Unfolded risk-return trade-offs and links to Macroeconomic Dynamics," Journal of Banking & Finance, Elsevier, vol. 82(C), pages 1-19.
    6. Thomas C. Chiang & Yuanqing Zhang, 2018. "An Empirical Investigation of Risk-Return Relations in Chinese Equity Markets: Evidence from Aggregate and Sectoral Data," IJFS, MDPI, vol. 6(2), pages 1-22, March.

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    More about this item

    Keywords

    Conditional variance and skewness; Intertemporal CAPM; Pacific basin equity markets; Risk–return trade-off;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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