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The risk-return tradeoff in international stock markets: one-step multivariate GARCH-M estimation with many assets

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  • Geert Dhaene
  • Piet Sercu
  • Jianbin Wu

Abstract

We study international asset pricing in a large-dimensional multivariate GARCH-in-mean framework. We examine different estimation methods and find that the two-step estimation method proposed by Bali and Engle (2010) tends to underestimate the risk-return coefficient and the corresponding standard error. We also show that the estimate is improved by one-step estimation and by increasing the cross-sectional dimension. Using stock index returns for up to 24 countries and 4 major currencies in the period 2001-2015, one-step estimation gives a market risk-return coefficient of around 6. The estimate is robust to variations in model specification, data frequency, and the number of stock markets considered.

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  • Geert Dhaene & Piet Sercu & Jianbin Wu, 2016. "The risk-return tradeoff in international stock markets: one-step multivariate GARCH-M estimation with many assets," Working Papers Department of Accountancy, Finance and Insurance (AFI), Leuven 544332, KU Leuven, Faculty of Economics and Business (FEB), Department of Accountancy, Finance and Insurance (AFI), Leuven.
    • Handle: RePEc:ete:afiper:544332
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