Empirical analysis of the intertemporal relationship between downside risk and expected returns: evidence from time-varying transition probability models

Chen, C. Y.-H. and Chiang, T. C. (2016) Empirical analysis of the intertemporal relationship between downside risk and expected returns: evidence from time-varying transition probability models. European Financial Management, 22(5), pp. 749-796. (doi:10.1111/eufm.12079)

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Abstract

This paper examines the intertemporal relationship between downside risks and expected stock returns for five advanced markets. Using Value‐at‐Risk (VaR) as a measure of downside risk, we find a positive and significant relationship between VaR and the expected return before the world financial crisis (September 2008). However, when we estimate the model using a sample after this date, the results show a negative risk–return relationship. Evidence from a two‐state Markov regime‐switching model indicates that as uncertainty rises, the sign of the risk–return relationship turns negative. Evidence suggests that the Markov regime‐switching model helps to resolve the conflicting signs in the risk–return relationship.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Chen, Professor Cathy Yi-Hsuan
Authors: Chen, C. Y.-H., and Chiang, T. C.
College/School:College of Social Sciences > Adam Smith Business School > Accounting and Finance
Journal Name:European Financial Management
Publisher:Wiley
ISSN:1354-7798
ISSN (Online):1468-036X
Published Online:21 December 2015

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