On the Risk-Return Relation in International Stock Markets, Forthcoming
FRB of St. Louis Working Paper No. 2003-012C
34 Pages Posted: 23 May 2006
Date Written: May 2006
We investigate the risk-return relation in international stock markets using realized variance constructed from MSCI (Morgan Stanley Capital International) daily stock price indices. In contrast with CAPM, realized variance by itself provides negligible information about future excess stock market returns; however, we uncover a positive and significant risk-return tradeoff in many countries after controlling for the (U.S.) consumption-wealth ratio. U.S. realized variance is also significantly related to future international stock market returns; more importantly, it always subsumes the information content of its local counterparts. Our results indicate that stock market variance is an important determinant of the equity premium.
Keywords: Capital market integration, stock return predictability, out-of-sample forecasts
JEL Classification: G1
Suggested Citation: Suggested Citation