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The Relation between Expected Returns and Volatility in the Brazilian Stock Market

Brazilian Review of Econometrics

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Title The Relation between Expected Returns and Volatility in the Brazilian Stock Market
The Relation between Expected Returns and Volatility in the Brazilian Stock Market
 
Creator Avelino, Ricardo R. G.; USP / FEA - Department of Economics
 
Subject Risk premium; Markov switching; endogenous regime shifts; volatility feedback.
C13, C34, G10
Risk premium; Markov switching; endogenous regime shifts; volatility feedback.
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Description This paper applies the Markov switching regression model of stock returns with volatility feedback of Turner, Startz and Nelson (1989), suitably extended to incorporate endogenous regime shifts, as in Kim, Piger and Startz (2008), to examine the intertemporal relationship between the risk premium and volatility in the Brazilian stock market over the period 1995-2011. The results suggest that there is a positive relationship between the risk premium and the expected volatility once the volatility feedback effect is taken into account. Unanticipated increases in volatility, in contrast, have a negative impact on the risk premium. This negative impact increasesby 50% when I account for endogeneity of regime shifts.
This paper applies the Markov switching regression model of stock returns with volatility feedback of Turner, Startz and Nelson (1989), suitably extended to incorporate endogenous regime shifts, as in Kim, Piger and Startz (2008), to examine the intertemporal relationship between the risk premium and volatility in the Brazilian stock market over the period 1995-2011. The results suggest that there is a positive relationship between the risk premium and the expected volatility once the volatility feedback effect is taken into account. Unanticipated increases in volatility, in contrast, have a negative impact on the risk premium. This negative impact increasesby 50% when I account for endogeneity of regime shifts.
 
Publisher Sociedade Brasileira de Econometria
 
Contributor —
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Date 2011-03-04
 
Type info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
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Format application/pdf
 
Identifier http://bibliotecadigital.fgv.br/ojs/index.php/bre/article/view/3895
10.12660/bre.v31n12011.3895
 
Source Brazilian Review of Econometrics; Vol 31, No 1 (2011); 45-68
Brazilian Review of Econometrics; Vol 31, No 1 (2011); 45-68
1980-2447
 
Language eng
 
Relation http://bibliotecadigital.fgv.br/ojs/index.php/bre/article/view/3895/2403