Is There a Risk-Return Tradeoff? Evidence from High-Frequency Data

39 Pages Posted: 3 Oct 2006

See all articles by Turan G. Bali

Turan G. Bali

Georgetown University - McDonough School of Business

Lin Peng

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Abstract

This paper examines the intertemporal relation between risk and return for the aggregate stock market using high-frequency data. We use daily realized, GARCH, implied, and range-based volatility estimators to determine the existence and significance of a risk-return tradeoff for several stock market indices. We find a positive and statistically significant relation between the conditional mean and conditional volatility of market returns at the daily level. This result is robust to alternative specifications of the volatility process, across different measures of market return and sample periods, and after controlling for macroeconomic variables associated with business cycle fluctuations. We also analyze the risk-return relationship over time using rolling regressions, and find that the strong positive relation persists throughout our sample period. The market risk measures adopted in the paper add power to the analysis by incorporating valuable information, either by taking advantage of high frequency intraday data (in the case of realized, GARCH, and range volatility) or by utilizing the market's expectation of future volatility (in the case of implied volatility index).

Keywords: ICAPM, intraday data, stock market volatility, stock market returns, risk-return tradeoff

JEL Classification: G10, G11, C13

Suggested Citation

Bali, Turan G. and Peng, Lin, Is There a Risk-Return Tradeoff? Evidence from High-Frequency Data. Available at SSRN: https://ssrn.com/abstract=934190 or http://dx.doi.org/10.2139/ssrn.934190

Turan G. Bali

Georgetown University - McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: https://sites.google.com/a/georgetown.edu/turan-bali

Lin Peng (Contact Author)

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
930
Abstract Views
3,136
Rank
46,502
PlumX Metrics