Risk-Return Trade-Off in the Pacific Basin Equity Markets
17 Pages Posted: 28 Dec 2011 Last revised: 25 Jan 2014
Date Written: November 27, 2013
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: Suggested Citation