The Risk-Return Trade-Off in Europe: A Temporal and Cross-Sectional Analysis

Posted: 26 Mar 2011

See all articles by Enrique Salvador

Enrique Salvador

Universitat Jaume I - Department of Finance and Accounting

Vicent Aragó

Jaume I University - Department of Finance and Accounting

Date Written: March 24, 2011

Abstract

This paper analyzes the risk-return trade-off in European equities considering both temporal and cross-sectional dimensions. In our analysis, we introduce not only the market portfolio but also 15 industry portfolios comprising the entire market. Several bivariate GARCH models are estimated to obtain the covariance matrix between excess market returns and the industrial portfolios and the existence of a risk-return trade-off is analyzed through a cross-sectional approach using the information in all portfolios. It is obtained evidence for a positive and significant risk-return trade-off in the European market. This conclusion is robust for different GARCH specifications and is even more evident after controlling for the main financial crisis during the sample period.

Keywords: Equity risk premium, multivariate GARCH, cross-sectional analysis, ICAPM, risk aversion

JEL Classification: G01, G12, G15

Suggested Citation

Salvador, Enrique and Aragó, Vicent, The Risk-Return Trade-Off in Europe: A Temporal and Cross-Sectional Analysis (March 24, 2011). Available at SSRN: https://ssrn.com/abstract=1794168 or http://dx.doi.org/10.2139/ssrn.1794168

Enrique Salvador (Contact Author)

Universitat Jaume I - Department of Finance and Accounting ( email )

Castellon
E-12071 Castello de la Plana, Castellón de la Plana 12071
Spain

Vicent Aragó

Jaume I University - Department of Finance and Accounting ( email )

Avda Sos Baynat s/N
Castellón, 12071
Spain

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