The Risk-Return Tradeoff in Emerging Markets

Abstract:     
This paper studies the risk-return tradeoff in some of the main emerging stock markets in the world. Although previous studies on emerging markets were not able to show a positive and significant tradeoff, favorable evidence can be obtained if a non-linear framework between return and risk is considered. However, this relationship between return and risk is essentially observed in periods of financial stability but not in times of market jitters. Using 15 years of weekly data observations in a Regime Switching-GARCH framework, I show favorable evidence in most of the emerging markets during low volatility periods, but not for periods of financial turmoil or using the traditional linear GARCH-M approach.

Number of Pages in PDF File: 25

working papers series