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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.

Suggested Citation

  • 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 of Department of Economics, Leuven 544332, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
    • Handle: RePEc:ete:ceswps:544332
    Note: paper number DPS 16.13
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