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The Relationship between Risk and Expected Return in Europe

Author

Listed:
  • León Valle Ángel

    (UNIVERSITY OF ALICANTE)

  • Nave Pineda Juan

    (UNIVERSITY OF ALICANTE UNIVERSITY OF CASTILLA-LA MANCHA UNIVERSITY OF THE BASQUE COUNTRY)

  • Rubio Irigoyen Gonzalo

    (UNIVERSITY OF CASTILLA LA-MANCHA UNIVERSITY OF THE BASQUE COUNTRY)

Abstract

We employ MIDAS (Mixed Data Sampling) to study the risk-expected return trade-off in several European stock indices. Using MIDAS, we report that, in most indices, there is a significant and positive relationship between risk and expected return. This strongly contrasts with the result we obtain when we employ both symmetric and asymmetric GARCH models for conditional variance. We also find that asymmetric specifications of the variance process within the MIDAS framework improve the relationship between risk and expected return. Finally, we introduce bivariate MIDAS and find some evidence of significant pricing of the hedging component for the intertemporal riskreturn trade-off.

Suggested Citation

  • León Valle Ángel & Nave Pineda Juan & Rubio Irigoyen Gonzalo, 2005. "The Relationship between Risk and Expected Return in Europe," Working Papers 201025, Fundacion BBVA / BBVA Foundation.
    • Handle: RePEc:fbb:wpaper:201025
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    References listed on IDEAS

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