Market States and the Risk-Return Tradeoff
The Quarterly Journal of Economics and Finance, 2016
Posted: 17 Apr 2019
Date Written: 2016
We re-examine the risk-return trade off in U.S. equity market by allowing for time variation in the tradeoff and estimating the conditional variance by the new mixed data sampling method. The main finding is that the risk-return tradeoff is strongly time-varying with the state of the market and the average of the time-varying tradeoff is 1.43. The lagged market return is found to be the best indicator of market states. The empirical finding holds true for a battery of robustness checks during the post-Compustat sample period. The evidence from the international markets is similar to the U.S. one.
Keywords: Risk-return tradeoff, time variation, market states, mixed data sampling
JEL Classification: G12
Suggested Citation: Suggested Citation