Dimitriou, Dimitrios and Simos, Theodore (2011): The relationship between stock returns and volatility in the seventeen largest international stock markets: A semi-parametric approach. Published in: Modern Economy , Vol. 1, No. 2 (January 2011): pp. 1-8.
Download (296kB) | Preview
We empirically investigate the relationship between expected stock returns and volatility in the twelve EMU countries as well as five major out of EMU international stock markets. The sample period starts from December 1992 until December 2007 i.e. up to the recent financial crisis. Empirical results in the literature are mixed with regard to the sign and significance of the mean – variance tradeoff. Based on parametric GARCH in mean models we find a weak relationship between expected returns and volatility for most of the markets. However, using a flexible semi-parametric specification for the conditional variance, we unravel significant evidence of a negative relationship in almost all markets. Furthermore, we investigate a related issue, the asymmetric reaction of volatility to positive and negative shocks in stock returns confirming a negative asymmetry in all markets.
|Item Type:||MPRA Paper|
|Original Title:||The relationship between stock returns and volatility in the seventeen largest international stock markets: A semi-parametric approach|
|Keywords:||Risk-return tradeoff; international stock markets; semi-parametric specification of conditional variance|
|Subjects:||F - International Economics > F1 - Trade > F15 - Economic Integration
G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions
F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements
|Depositing User:||Dimitrios Dimitriou|
|Date Deposited:||21. Mar 2012 13:41|
|Last Modified:||30. Dec 2015 15:54|
Baillie R.T. and DeGennaro R.P., “Stock returns and volatility,” Journa1 of Financia1 and Quantitative Ana1ysis, vol. 5, no. 2, June 1990, pp. 203-214.
Bialtagi Β. and Li Q., “Estimation of econometric models with non parametrically specified risk terms: with applications to exchange markets,” Econometric Reviews, vol. 20, no. 4, 2001, pp. 445-460.
Bakaert G. and Cambell R. Harvey, “Time-varying world market intergration”, Journal of Finance,” vol. 50, no. 2, June 1995, pp. 403-444.
Bakaert G. and Wu G., “Asymmetric volatility and risk in equity markets,” Review of Financial Studies, vol. 13, no. 1, 2000, pp. 1-42.
B1ack F., “Studies of stock price volatility changes,” Proceedings of the 1976 Meeting of Business and Economics Statistics Section of the American Statistical Association, vol. 27, 1976, pp. 399-418.
Bollerslev Τ., “Generalized autoregressive conditional heteroscedasticity,” Journa1 of Econometrics, vol. 31, no. 3, 1986, pp. 307-327.
Bollers1ev Τ., Chou R.Y. and Kroner K.F., “ARCH modeling in finance: A review of the theory and empirical evidence,” Journal of Econometrics, vol. 52, no. 1-2, 1992, pp. 5-59.
Bollerslev T., R.F. Engle and D.B. Nelson, “ARCH Models,” in R.F. Engle and D. McFadden Ed., Handbook of Econometrics, Amsterdam: North-Holland, vol. 4, 1994, pp. 2959-3038.
Campbell R. Harvey, “Time-varying conditional covariances in tests of asset pricing models,” Journal of Financial Economics, vol. 24, no. 2, 1989, pp. 289-317.
Choudhry Τ., “Stock market volatility and the crash of 1987: evidence from six emerging markets,” Journa1 of Intemationa1 Money and Finance, vol. 15, no. 6, 1996, pp. 969-981.
Cox J. and Ross S., “The valuation of options for alternative stochastic process,” Journa1 of Financia1 Economics, vol. 3, no.1-2, 1976, pp. 145-166.
De Jong R., “Convergence rates and asymptotic norma1ity for series estimators: uniform convergence rates,” Jouma1 of Econometrics, vol. 111, no 1, 2002, pp. 1-9.
Eng1e R.F. and Ng V.K., “Measuring and testing the impact of news on volatility,” Journa1 of Finance, vol. 48, no. 5, 1993, pp. 1749-1778.
Eugene F. Fama and William G. Schwert , “Asset returns and inflation,” Journal of Financial Economics, vol. 5, no. 2, 1977, pp. 115-146.
French K.R., Schwert G.W. and Stambaugh R.F., “Expected stock returns and volatility,” Journal of Financial Economics, vol. 19, no. 1, 1987, pp. 3-30.
Glosten L.R., Jagannathan R. and Runkle D.E., “On the relation between the expected value and volatility of nominal excess return on stocks,” Journal of Finance, vol. 48, no. 5, 1993, pp. 1779-1801.
Hentschel Ludger, “All in the family nesting symmetric and asymmetric GARCH models,” Journal of Financial Economics, vol. 39, no. 1, September 1995, pp. 71-104.
John Y. Campbell and Ludger Hentschel, “No news is good news: An asymmetric model of changing volatility in stock returns,” Journal of Financial Economics, vol. 31, no. 3, 1992, pp. 281-318.
K. C. Chan, A. Karolyi and R. Stulz, “Global financial markets and the risk premium on US equity,” Journal of Financial Economics, vol. 32, no. 2, 1992, pp. 137-167.
Lee C.F., Chen G. and Rui O., “Stock returns and volatility on China's stock markets,” Journal of Financial Research, vol. 24, no. 4, 2001, pp. 523-543.
Linter J., “The valuation of risky assets and the selection of risky investments in stock portfolios and capital budgets,” Review of Economics and Statistics, vol. 47, no. 1, February 1965, pp. 13-37.
Merton R.C., “An intertemporal capital asset pricing model,” Econometrica, vol. 41, no. 5, September 1973, pp. 867-887.
Merton R.C., “On estimating the expected return on the market: an exploratory investigation,” Journal of Financial Economics, vol. 8, no. 4, 1980, pp. 323-361.
Mossin J., “Equilibrium in a capital asset market,” Econometrica, vol. 34, no. 4, October 1966, pp. 768-783.
Nelson D., “Conditional heteroscedasticity in asset returns: a new approach,” Econometrica, vol. 59, no. 2, March 1991, pp. 347-370.
Newey W., “Convergence rates and asymptotic normality for series estimators,” Journal of Econometrics, vol. 79, no. 1, July 1997, pp. 147-168.
Pagan A.R. and Ullah, A., “The econometric analysis of models with risk terms,” Journal of Applied Econometrics, vol. 3, no. 2, April 1988, pp. 87-105.
Poterba J. and Summers L., “The persistence of volatility and stock market fluctuations,” American Economic Review, vol. 76, no. 5, 1986, pp. 1142-1151.
Qi Li, Jian Yang, Cheng Hsiao and Young-Jae Chang, “The relationship between stock returns and volatility in international stock markets,” Journal of Empirical Finance, vol. 12, no. 5, December 2005, pp. 650-665.
R.J. Shiller, “Do prices move too much to be justified by subsequent changes in dividends,” American Economic Review, vol. 71, no. 3, June 1981, pp. 421-436
Schumaker L.L., “Spline Functions: Basic Theory,” Wiley, New York, 1981.
Sharpe W.F., “Capital asset prices: a theory of market equilibrium under conditions of market risk,” Journal of Finance, vol. 19, no. 3, September 1964, pp. 425-442.
Shawky Hany A. and Achla Marathe, “Expected Stock Returns and Volatility in a two regime Market,” The Journal of Economics and Business, vol. 47, no. 5, December 1995, pp. 409-422.
Theodossiou P. and Lee D., “Relationship between volatility and expected returns across international stock markets,” Journal of Business Finance and Accounting, vol. 22, no. 2, March 1995, pp. 289-300.
Whitelaw R., “Stock market risk and return: an empirical equilibrium approach,” Review of Financial Studies, vol.13, no. 3, 2000, pp. 521-547.
Yang L., “Direct estimation in an additive model when the components are proportional,” Statistica Sinica, vol. 12, 2002, pp. 801 -821.