Market States and the Risk-Return Tradeoff

The Quarterly Journal of Economics and Finance, 2016

Posted: 17 Apr 2019

See all articles by Zijun Wang

Zijun Wang

Texas A&M University

Moosa

Prairie View A&M University

Date Written: 2016

Abstract

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

Wang, Zijun and Khan, M. Moosa, Market States and the Risk-Return Tradeoff (2016). The Quarterly Journal of Economics and Finance, 2016. Available at SSRN: https://ssrn.com/abstract=3356754

Zijun Wang (Contact Author)

Texas A&M University ( email )

Langford Building A
798 Ross St.
College Station, TX 77843-3137
United States

M. Moosa Khan

Prairie View A&M University ( email )

Prairie View, TX 77446
United States
936-261-9244 (Phone)
936-261-9273 (Fax)

HOME PAGE: http://www.pvamu.edu

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