Quantile Risk-Return Trade-Off
22 Pages Posted: 13 May 2021
Date Written: May 12, 2021
We investigate the risk-return trade-off on the US and European stock markets. We investigate the non-linear risk-return trade-off with a special eye to the tails of the stock returns using quantile regressions. We first consider the US stock market portfolio. We find that the risk-return trade-off is significantly positive at the upper tail (0.9 quantile), where the upper tail is large positive excess returns. The positive trade-off is as expected from asset pricing models. For the lower tail (0.1 quantile), that is for large negative stock returns, the trade-off is significantly negative. And for the median (0.5 quantile), the risk-return trade-off is insignificant. These results are recovered for the US industry portfolios as well as for Eurozone stock market portfolios.
Keywords: risk-return trade-off; quantile regressions; VIX; stock markets
JEL Classification: C22; G12; G15
Suggested Citation: Suggested Citation