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

See all articles by Hui Guo

Hui Guo

University of Cincinnati - Department of Finance - Real Estate

Date Written: May 2006

Abstract

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

Guo, Hui, On the Risk-Return Relation in International Stock Markets, Forthcoming (May 2006). FRB of St. Louis Working Paper No. 2003-012C, Available at SSRN: https://ssrn.com/abstract=903818 or http://dx.doi.org/10.2139/ssrn.903818

Hui Guo (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business
418 Carl H. Lindner Hall
Cincinnati, OH 45221
United States
513.556.7077 (Phone)
513.556.0979 (Fax)

HOME PAGE: http://homepages.uc.edu/~guohu/

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