The Risk Return Relationship: Evidence from Index Return and Realised Variance Series
32 Pages Posted: 25 Mar 2014 Last revised: 20 Aug 2019
Date Written: March 24, 2014
The risk return relationship is analysed in bivariate models for return and realised variance (RV) series. Based on daily time series from 21 international market indices for more than 13 years (January 2000 to February 2013), the empirical findings support the arguments of risk return tradeoff, volatility feedback and statistical balance. It is reasoned that the empirical risk return relationship is primarily shaped by two important data features: the negative contemporaneous correlation between the return and RV, and the difference in the autocorrelation structures of the return and RV.
Keywords: risk premium, volatility feedback, return predictability, realised variance model, statistical balance
JEL Classification: C32, C52, G12, G10
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