Investigating the Intertemporal Risk-Return Relation in International Stock Markets with the Component GARCH Model
Federal Reserve Bank St. Louis Working Paper No. 2006-006
24 Pages Posted: 31 Jan 2006
Date Written: January 2006
We revisit the risk-return relation using the component GARCH model and international daily MSCI stock market data. In contrast with the previous evidence obtained from weekly and monthly data, daily data show that the relation is positive in almost all markets and often statistically significant. Likelihood ratio tests reject the standard GARCH model in favor of the component GARCH model, which strengthens the evidence for a positive risk-return tradeoff. Consistent with U.S. evidence, the long-run component of volatility is a more important determinant of the conditional equity premium than the short-run component for most international markets.
Keywords: GARCH-in-mean, Component GARCH, Risk-return relation, International stock market returns
JEL Classification: G10, G12
Suggested Citation: Suggested Citation