Risk-Return Trade-Off for European Stock Markets

58 Pages Posted: 29 Jul 2013 Last revised: 31 Jan 2015

See all articles by Nektarios Aslanidis

Nektarios Aslanidis

Universitat Rovira Virgili

Charlotte Christiansen

Aarhus University - CREATES

Christos S. Savva

Cyprus University of Technology - Department of Commerce, Finance and Shipping

Date Written: January 31, 2015

Abstract

This paper adopts factor models with macro-finance predictors to test the intertemporal risk-return relation for 13 European stock markets from 1986 to 2012. We filter out country specific, euro area, and US macro-finance factors from the conditional volatility and return to determine the risk-return relationship. We find that the risk-return trade-off is generally negative. The Markov switching model documents that there is time-variation in this trade-off that is linked to the state of the economy, but not the business cycles. Quantile regressions show that the risk-return trade-off is stronger at the lowest quantile of the conditional return.

Keywords: European stock markets; Factor model; Macro-finance predictors; Markov switching model; Quantile regressions; Risk-return trade-off

JEL Classification: C22, G11, G12, G15

Suggested Citation

Aslanidis, Nektarios and Christiansen, Charlotte and Savva, Christos S., Risk-Return Trade-Off for European Stock Markets (January 31, 2015). Available at SSRN: https://ssrn.com/abstract=2302487 or http://dx.doi.org/10.2139/ssrn.2302487

Nektarios Aslanidis

Universitat Rovira Virgili ( email )

Tarragona
Spain

Charlotte Christiansen (Contact Author)

Aarhus University - CREATES ( email )

Fuglesangs Alle 4
Aarhus V, DK 8210
Denmark

Christos S. Savva

Cyprus University of Technology - Department of Commerce, Finance and Shipping ( email )

Limassol, 3603
Cyprus
00357252349 (Phone)
00357252674 (Fax)

HOME PAGE: http://www.csavva.com

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