The non-linear trade-off between return and risk: a regime-switching multi-factor framework

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Title: The non-linear trade-off between return and risk: a regime-switching multi-factor framework
Authors: Cotter, John
Salvador, Enrique
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Date: Oct-2014
Abstract: This study develops a multi-factor framework where not only market risk is considered but also potential changes in the investment opportunity set. Although previous studies find no clear evidence about a positive and significant relation between return and risk, favourable evidence can be obtained if a non-linear relation is pursued. The positive and significant risk-return trade-off is essentially observed during low volatility periods. However, this relationship is not obtained during periods of high volatility. Also, different patterns for the risk premium dynamics in low and high volatility periods are obtained both in prices of risk and market risk dynamics.  
Funding Details: Irish Research Council
Science Foundation Ireland
Type of material: Working Paper
Publisher: University College Dublin. Geary Institute
Start page: 1
End page: 40
Series/Report no.: UCD Geary Institute Discussion Paper Series; WP2014/14
Keywords: Non-linear risk-return trade-offPro-cyclical risk aversionRegime Switching GARCHMulti-factor modelRisk premium
Language: en
Status of Item: Not peer reviewed
Appears in Collections:Geary Institute Working Papers
Business Research Collection

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