Risk-Return Trade-Off in the Pacific Basin Equity Markets

17 Pages Posted: 28 Dec 2011 Last revised: 25 Jan 2014

See all articles by Ai-ru Meg Cheng

Ai-ru Meg Cheng

University of California, Santa Cruz - Department of Economics

Mohammad R. Jahan-Parvar

Board of Governors of the Federal Reserve System

Date Written: November 27, 2013

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.

Keywords: Binormal distribution, Conditional variance, Conditional skewness, GARCH, Intertemporal CAPM, Mixed data sampling, Pacific basin equity markets, Risk-return trade-off

JEL Classification: C22, G12, G15

Suggested Citation

Cheng, Ai-Ru and Jahan-Parvar, Mohammad R., Risk-Return Trade-Off in the Pacific Basin Equity Markets (November 27, 2013). Emerging Markets Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1977330 or http://dx.doi.org/10.2139/ssrn.1977330

Ai-Ru Cheng

University of California, Santa Cruz - Department of Economics ( email )

1156 High street
University of California
Santa Cruz, CA 95064
United States

HOME PAGE: http://people.ucsc.edu/~archeng

Mohammad R. Jahan-Parvar (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://sites.google.com/site/mrjahan/

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