The Risk-Return Relation in International Stock Markets

23 Pages Posted: 20 Nov 2006

See all articles by Hui Guo

Hui Guo

University of Cincinnati - Department of Finance - Real Estate

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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 the capital asset pricing model, 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.

Suggested Citation

Guo, Hui, The Risk-Return Relation in International Stock Markets. The Financial Review, Vol. 41, No. 4, pp. 565-587, November 2006, Available at SSRN: https://ssrn.com/abstract=945524 or http://dx.doi.org/10.1111/j.1540-6288.2006.00157.x

Hui Guo (Contact Author)

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

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