QR-GARCH-M Model for Risk-Return Tradeoff in U.S. Stock Returns and Business Cycles

Nyberg, Henri (2010): QR-GARCH-M Model for Risk-Return Tradeoff in U.S. Stock Returns and Business Cycles.

Abstract

In the empirical finance literature findings on the risk return tradeoff in excess stock market returns are ambiguous. In this study, we develop a new QR-GARCH-M model combining a probit model for a binary business cycle indicator and a regime switching GARCH-in-mean model for excess stock market return with the business cycle indicator defining the regime. Estimation results show that there is statistically significant variation in the U.S. excess stock returns over the business cycle. However, consistent with the conditional ICAPM, there is a positive risk-return relationship between volatility and expected return independent of the state of the economy.

• Item Type: MPRA Paper
• Language: English
• Keywords: Regime switching GARCH model; GARCH-in-mean model; probit model; stock return; risk-return tradeoff; business cycle
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy

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