Risk and Return: Some New Evidence

43 Pages Posted: 12 Nov 2008

See all articles by Hui Guo

Hui Guo

University of Cincinnati - Department of Finance - Real Estate

Robert Whitelaw

New York University; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: October 2000


We develop a structural asset pricing model to investigate the relationship between stockmarket risk and return. The structural model is estimated using the conditional market variance implied by S&P 100 index option prices. Relative risk aversion is precisely identified and is found to be positive, with point estimates ranging from 3.06 to 4.01. However, the implied volatility data only spans the period November 1983 to May 1995. As a robustness check, the structural model is also examined with postwar monthly data, in which the conditional market variance is estimated. We again find a positive and significant risk-return relation and getsimilar point estimates for relative risk aversion. Additionally, we document some facts about stock market return. First, stock price movements are primarily driven by changes in investment opportunities, not by changes in market volatility. Second, there is some evidence of a leverage effect. Third, relative risk aversion is quite stable over time.

Suggested Citation

Guo, Hui and Whitelaw, Robert F., Risk and Return: Some New Evidence (October 2000). NYU Working Paper No. S-MF-00-08, Available at SSRN: https://ssrn.com/abstract=1300250

Hui Guo (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business
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Cincinnati, OH 45221
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HOME PAGE: http://homepages.uc.edu/~guohu/

Robert F. Whitelaw

New York University ( email )

Stern School of Business
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National Bureau of Economic Research (NBER)

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