Is Australia Risk Averse? Some Evidence from the All Ordinaries Index Market
36 Pages Posted: 13 Mar 2008 Last revised: 2 Jun 2008
Date Written: March 1, 2008
Abstract
Some previous work has documented a negative and insignificant risk-return relation in the Australian stock market. This study follows a systematic approach to re-examine such relationship in the All Ordinaries Index market and provide some evidence in favor of a positive and significant risk-return trade-off in the Australian market. We employ a modified univariate EGARCH-in-mean model, the MGME model, and two GMM systems with ICAPM of Merton (1973) in estimating conditional simple and partial risk-return relation in the market, considering and controlling for various empirical factors affecting the estimation. It is found that simple risk-return relation can be positive and partial risk-return relation (as in the ICAPM) is positive and significant in the All Ordinaries Index market. We employ alternative risk measures and a different econometrical approach in testing the findings and demonstrate the results to be robust and reasonable. We conclude that this study provides some evidence that the All Ordinaries market has a positive risk-return relationship and the Australian stock market investors are risk-averse.
Keywords: risk-return, all ordinaries, risk averse, ICAPM, EGARCH-in-Mean, GMM
JEL Classification: G10, G12
Suggested Citation: Suggested Citation
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