Risk-Return Relation in Stock Returns under Economic Constraints

56 Pages Posted: 28 Sep 2022

Date Written: September 21, 2022

Abstract

We obtain new methodological and empirical perspectives on the fundamental risk-return tradeoff in stock returns by imposing economic and asset pricing motivated constraints on the equity premium. In contrast to highly ambiguous past empirical findings, these constraints result in a nonlinear model implying a bounded and positive risk-return relationship. Our empirical results show that the positive risk-return relation in the U.S. data is statistically significant over the mean return benchmark and the magnitudes of the risk aversion coefficients are slightly smaller than obtained without the constraints.

Keywords: Nonlinearity, ICAPM, risk aversion, non-nested model

JEL Classification: C12, C22, G10, G12

Suggested Citation

Nyberg, Henri, Risk-Return Relation in Stock Returns under Economic Constraints (September 21, 2022). Available at SSRN: https://ssrn.com/abstract=4225052 or http://dx.doi.org/10.2139/ssrn.4225052

Henri Nyberg (Contact Author)

University of Turku ( email )

Turku, 20014
Finland

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