The Risk-Return Tradeoff in International Stock Markets: One-Step Multivariate GARCH-M Estimation with Many Assets

KU Leuven Department of Economics, Discussion Paper Series DPS16.13

26 Pages Posted: 23 Jun 2016

See all articles by Geert Dhaene

Geert Dhaene

KU Leuven - Department of Economics

Piet Sercu

FEB at KU Leuven

Wu Jianbin

KU Leuven - Department of Economics

Date Written: June 15, 2016

Abstract

We study international asset pricing in a large-dimensional multivariate GARCH-in-mean framework. We examine different estimation methods and find that the two-step estimation method proposed by Bali and Engle (2010) tends to underestimate the risk-return coefficient and the corresponding standard error. We also show that the estimate is improved by one-step estimation and by increasing the cross-sectional dimension. Using stock index returns for up to 24 countries and 4 major currencies in the period 2001-2015, one-step estimation gives a market risk-return coefficient of around 6. The estimate is robust to variations in model specification, data frequency, and the number of stock markets considered.

Keywords: international asset pricing, currency risk, multivariate GARCH-M

Suggested Citation

Dhaene, Geert and Sercu, Piet M. F. A. and Jianbin, Wu, The Risk-Return Tradeoff in International Stock Markets: One-Step Multivariate GARCH-M Estimation with Many Assets (June 15, 2016). KU Leuven Department of Economics, Discussion Paper Series DPS16.13, Available at SSRN: https://ssrn.com/abstract=2799573 or http://dx.doi.org/10.2139/ssrn.2799573

Geert Dhaene (Contact Author)

KU Leuven - Department of Economics ( email )

Leuven, B-3000
Belgium

Piet M. F. A. Sercu

FEB at KU Leuven ( email )

Naamsestraat 69
Faculty of Economics and Business
Leuven, 3000
Belgium
+32 16 32 67 56 (Phone)
+32 16 32 67 32 (Fax)

Wu Jianbin

KU Leuven - Department of Economics ( email )

Leuven, B-3000
Belgium

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