Investigating ICAPM in International Futures Markets
Review of Futures Markets, 2011, 19(3), 195-216
18 Pages Posted: 15 Jul 2009 Last revised: 12 Dec 2012
Date Written: June 15, 2010
This paper investigates the significance of an intertemporal relation between expected return and risk for the futures markets. The paper not only takes a look at the domestic futures, but the relationship between conditional risk and return is examined in international futures markets as well. We test the significance of a daily risk-return tradeoff in stock index futures for G8 countries (US, Canada, UK, Germany, France, Italy, Japan, and Australia). We use GARCH modeling with the thin-tailed normal and the fat-tailed Student t, generalized error, and generalized t distributions to simultaneously generate risk measures and forecast expected futures returns. The maximum likelihood parameter estimates indicate that the relation between risk and return is flat in futures markets. This result is robust across eight different countries..
Keywords: stock index futures, international futures markets, risk-return tradeoff, GARCH-in-mean.
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