Time-Varying Risk-Return Trade-off in the Stock Market

We propose a dynamic, forward-looking hedging strategy to manage stock market risks via positions in REITs, conditional on the level of risk aversion. Our findings show that REITs do not only offer significant risk reduction for passive portfolios, but also offer much improved risk-adjusted returns with the greatest benefits observed for Australia, Canada and the U.S. Overall, our findings suggest that time-varying risk aversion can be utilized to (i) establish effective hedges against stock market risks via positions in REITS, and (ii) improve the risk-return profile of passive portfolios.

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Quantile Risk–Return Trade-Off

Journal of Risk and Financial Management ◽

10.3390/jrfm14060249 ◽

2021 ◽

Vol 14 (6) ◽

pp. 249

Author(s):

Nektarios Aslanidis ◽

Charlotte Christiansen ◽

Christos S. Savva

Keyword(s):

Stock Market ◽

Stock Returns ◽

Quantile Regressions ◽

Lower Tail ◽

Trade Off ◽

Risk Return ◽

Market Portfolio ◽

Asset Pricing Models ◽

The Us ◽

European Stock Markets

We investigate the risk–return trade-off on the US and European stock markets. We investigate the non-linear risk–return trade-off with a special eye to the tails of the stock returns using quantile regressions. We first consider the US stock market portfolio. We find that the risk–return trade-off is significantly positive at the upper tail (0.9 quantile), where the upper tail is large positive excess returns. The positive trade-off is as expected from asset pricing models. For the lower tail (0.1 quantile), that is for large negative stock returns, the trade-off is significantly negative. Additionally, for the median (0.5 quantile), the risk–return trade-off is insignificant. These results are recovered for the US industry portfolios and for Eurozone stock market portfolios.

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Risk-return trade-off, information diffusion, and U.S. stock market predictability

International Journal of Financial Engineering ◽

10.1142/s2424786315500383 ◽

2015 ◽

Vol 02 (04) ◽

pp. 1550038 ◽

Cited By ~ 2

Author(s):

Haibin Xie ◽

Shouyang Wang

Keyword(s):

Stock Market ◽

Information Diffusion ◽

Stock Return ◽

Empirical Studies ◽

Market Returns ◽

Complementary Information ◽

Stock Market Returns ◽

Trade Off ◽

Academic Literature ◽

Risk Return

Recent academic literature in finance documents both risk-return trade-off and gradual information diffusion (ID). Motivated by these two financial theories, this paper proposes the ARCH-M model augmented by an ID indicator to forecast the U.S. stock market returns. Empirical studies performed on the monthly S&P500 index show that our approach is useful in both statistical and economic sense. Further analysis shows that the ID provides complementary information to risk-return trade-off effect. Our findings confirm that financial theories are valuable for stock return forecasting.

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Asymmetric impacts of individual investor sentiment on the time-varying risk-return relation in stock market

International Review of Economics & Finance ◽

10.1016/j.iref.2021.11.018 ◽

2022 ◽

Vol 78 ◽

pp. 177-194

Author(s):

Zhifang He

Keyword(s):

Stock Market ◽

Investor Sentiment ◽

Time Varying ◽

Individual Investor ◽

Risk Return

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IS COMMONALITY IN LIQUIDITY A PRICED RISK FACTOR?

RAM Revista de Administração Mackenzie ◽

10.1590/1678-6971/eramf200158 ◽

2020 ◽

Vol 21 (2) ◽

Author(s):

CLÁUDIO P. SILVA JÚNIOR ◽

MÁRCIO A. V. MACHADO

Keyword(s):

Risk Factor ◽

Stock Market ◽

Financial Crises ◽

Stock Return ◽

Design Methodology ◽

Investment Strategy ◽

Knowledge Development ◽

Trade Off ◽

Risk Return ◽

International Financial Crises

ABSTRACT Purpose: Analyze if the commonality in liquidity is priced and its relation with the stock return in the Brazilian stock market. Originality/value: Due to the shortage of papers about the effects of commonality in liquidity in the Brazilian financial literature, this paper provides knowledge development about commonality in liquidity effect for the investor, investigating whether an investment strategy in the most sensitive assets to systematic variations of liquidity is attractive for investors, consistent with the risk-return trade off. Design/methodology/approach: In order to identify the effect of commonality to investors, we opted to use portfolios. Using companies listed on B3 as a sample, we estimated regressions developed in the time series from January 2007 to December 2015. Findings: We found that the commonality is a phenomenon present in the Brazilian stock market and their highest values were concentrated in periods of international financial crises. In addition, using portfolios, we observed a premium of 4.165% per month for the commonality in liquidity, although not statistically significant. Finally, we found that the commonality in liquidity is a priced risk factor and when we exposed it to other risk factors we found that the liquidity risk factor was able to partly capture it.

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Estimating Stock Returns Volatility and the Risk-Return Nexus in the Nigerian Stock Market in the Presence of Shift Dummies

Asian Research Journal of Mathematics ◽

10.9734/arjom/2019/v13i130097 ◽

2019 ◽

pp. 1-15

Author(s):

David Adugh Kuhe ◽

Moses Abanyam Chiawa ◽

Sylvester Chigozie Nwaosu ◽

Jonathan Atsua Ikughur

Keyword(s):

Financial Crisis ◽

Stock Market ◽

Stock Returns ◽

Financial Stability ◽

Global Financial Crisis ◽

Stock Exchange ◽

Stock Market Volatility ◽

Trade Off ◽

Risk Return ◽

Market Changes

Volatility and the trade-off between risk and return in stock markets is an important subject in financial theory which play significant role in investment decision making, portfolio selection, options pricing, financial stability, hedging and pair trading strategy among others. This study estimates stock return volatility and analyses the risk-return trade-off in the Nigerian stock market using symmetric GARCH (1,1)-in-mean, asymmetric CGARCH (1,1)-in-mean and EGARCH (1,1)-in-mean models with Generalized Error Distribution and Student-t innovation. Data on daily closing all share prices of the Nigerian stock exchange for the period 2nd January, 1998 to 9th January, 2018 are utilised. The data is further divided into three sub-periods of pre-crisis, global financial crisis and post crisis periods to allow volatility behaviour and the risk-return trade-off to be investigated across the sub-periods. Results showed evidence of volatility clustering, leptokurtosis, high persistence of shocks to volatility and asymmetry without leverage effects across the study periods. The persistence of shocks to volatility increased during the global financial crisis period with delayed reactions of volatility to market changes. However, by incorporating the exogenous breaks into the volatility models for the full study period, the shock persistence drastically reduced with faster reactions of volatility to market changes. The results of this study also found supportive evidence for a significant positive risk-return relationship in Nigerian stock market across various study sub-periods and model specifications meaning that investors in Nigerian stock market should be compensated for holding risky assets. The empirical findings of this study further suggest that the recent global financial crisis have not altered the market dynamics to distort the risk-return trade-off in Nigerian stock market indicating that expected returns are not driven by changes in the stock market volatility. The study provides some policy recommendations for investors and policy makers in the Nigerian stock market.

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