Is there a Positive Risk‐Return Tradeoff? A Forward‐Looking Approach to Measuring the Equity Premium

Abstract

This article revisits the puzzling time‐series relation between risk and return on the stock market portfolio. It replaces the standard ex post mean returns with forward‐looking calculations of the equity risk premium derived from the classic Gordon stock valuation model. The article estimates the equity premium for several industrialised markets and finds that conditional market risk is significantly priced in the context of asset pricing theory both in the short‐ and long‐run using various specifications for volatility. Findings herein lend credible support for the presence of a positive intertemporal risk‐return relation and suggest that perhaps ex post realised returns are unjustifiably used to make ex ante inferences regarding expected returns and to motivate asset pricing tests.

Using Operational and Stock Analytics to Measure Airline Performance: A Network DEA Approach

“…Our results also indicate that there is no relationship between performance scores and capital gains. This finding lends support to a growing branch of behavioral finance literature, which shows that stock prices can behave in ways that do not reflect fundamental aspects of a firm, such as its operational performance, and can deviate from “fair” values indefinitely (Koutmos, 2015). They are prone to such deviations as a result of speculative buying and selling decisions that take place in the market and as a result of traders with heterogeneous trading styles.…”

The timing of new corporate debt issues and the risk-return tradeoff

“…Some report a positive risk-return tradeoff while others find a statistically weak or negative risk-return tradeoff (French et al, 1987;Glosten et al, 1993;Nelson, 1991;Koutmos, 2012). A negative tradeoff appears to be irreconcilable from the viewpoint that we are rational riskaverse individuals and that higher betas ought to be associated with higher expected returns (Koutmos, 2015).…”

Herding and feedback trading in cryptocurrency markets

“…Theoretically, these models have been applied to traditional asset classes, including equity market indices and financial futures markets, with a consensus that herding (trend chasing) behaviors are present in such markets (Koutmos 2012 ). Additionally, asset pricing tests extensively document a negative risk-return relation in equity markets (Sentana and Wadhwani 1992 ; Koutmos 2015 ).…”