Risk-Return Trade-Off for European Stock Markets
58 Pages Posted: 29 Jul 2013 Last revised: 31 Jan 2015
Date Written: January 31, 2015
Abstract
This paper adopts factor models with macro-finance predictors to test the intertemporal risk-return relation for 13 European stock markets from 1986 to 2012. We filter out country specific, euro area, and US macro-finance factors from the conditional volatility and return to determine the risk-return relationship. We find that the risk-return trade-off is generally negative. The Markov switching model documents that there is time-variation in this trade-off that is linked to the state of the economy, but not the business cycles. Quantile regressions show that the risk-return trade-off is stronger at the lowest quantile of the conditional return.
Keywords: European stock markets; Factor model; Macro-finance predictors; Markov switching model; Quantile regressions; Risk-return trade-off
JEL Classification: C22, G11, G12, G15
Suggested Citation: Suggested Citation