The Role of U.S. Market on International Risk-Return Tradeoff Relations

Abstract

We study the intertemporal risk-return tradeoff relations based on returns from 18 international markets. We find striking new empirical evidence that the inclusion of U.S. market returns significantly changes the estimated risk-return tradeoff relations in international markets from mostly negative to predominantly positive. Our results are consistent with the lead-lag effect between U.S. and international markets in the sense of Rapach, Strauss, and Zhou (2013).

Keywords: Risk-Return Tradeoff, International Markets, Intertemporal CAPM, Lead-Lag Effect, Multivariate GARCH-in-Mean

JEL Classification: G11, G12, G15