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Intertemporal risk-return tradeoff in the short-run

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  • Marks, Joseph M.
  • Nam, Kiseok

Abstract

We hypothesize that good (bad) market news causes overpricing (underpricing) in the short-term, thereby inducing a weak or negative (significantly positive) intertemporal risk-return tradeoff. We verify this asymmetry through the indirect relation of a weak or positive association between excess market returns and contemporaneous volatility innovations conditional on good news, and a significantly negative relation conditional on bad news. We also show that the inclusion of a price adjustment term is critical for reliable estimation of the intertemporal risk-return relation.

Suggested Citation

  • Marks, Joseph M. & Nam, Kiseok, 2018. "Intertemporal risk-return tradeoff in the short-run," Economics Letters, Elsevier, vol. 172(C), pages 81-84.
    • Handle: RePEc:eee:ecolet:v:172:y:2018:i:c:p:81-84
    DOI: 10.1016/j.econlet.2018.08.031
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    Cited by:

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    2. Kilic, Osman & Nam, Kiseok & O'Connor, Matthew L., 2024. "State-dependent volatility feedback effect in the ICAPM," Finance Research Letters, Elsevier, vol. 59(C).
    3. Chelikani, Surya & Marks, Joseph M. & Nam, Kiseok, 2023. "Volatility feedback effect and risk-return tradeoff," The Quarterly Review of Economics and Finance, Elsevier, vol. 92(C), pages 49-65.

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    More about this item

    Keywords

    Intertemporal risk-return tradeoff; Underpricing; Overpricing; Price adjustment; Asymmetry;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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