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Estimating and Analyzing the Risk-Return Relationship in the Stock Market

Mujiri, Giorgi LU (2012) NEKP01 20121
Department of Economics
Abstract (Swedish)
The main purpose of this thesis is to estimate and investigate the relationship between risk and expected return in the stock market within a time-series context. The model is based on the intertemporal capital asset pricing model (ICAPM), and the method of log-linearization is implemented in the analysis. As a result, two main components of expected returns, the risk and hedge components are identified separately. The major findings agree with the recent literature: First, the estimated coefficient of relative risk aversion appears to be positive, statistically significant, and large in magnitude. Second, changes in investment opportunities and stock market volatility affect expected returns on a portfolio significantly. And third, there... (More)
The main purpose of this thesis is to estimate and investigate the relationship between risk and expected return in the stock market within a time-series context. The model is based on the intertemporal capital asset pricing model (ICAPM), and the method of log-linearization is implemented in the analysis. As a result, two main components of expected returns, the risk and hedge components are identified separately. The major findings agree with the recent literature: First, the estimated coefficient of relative risk aversion appears to be positive, statistically significant, and large in magnitude. Second, changes in investment opportunities and stock market volatility affect expected returns on a portfolio significantly. And third, there is a negative correlation between the portfolio risk and hedge components. Therefore, the coefficient on the risk component of expected returns is downward biased when the hedge component is omitted from the model. (Less)
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author
Mujiri, Giorgi LU
supervisor
organization
course
NEKP01 20121
year
type
H2 - Master's Degree (Two Years)
subject
keywords
expected return, The risk-return relationship, the risk component, the hedge component, implied volatility.
language
English
id
2607946
date added to LUP
2012-06-15 09:30:17
date last changed
2012-06-15 09:30:17
@misc{2607946,
  abstract     = {The main purpose of this thesis is to estimate and investigate the relationship between risk and expected return in the stock market within a time-series context. The model is based on the intertemporal capital asset pricing model (ICAPM), and the method of log-linearization is implemented in the analysis. As a result, two main components of expected returns, the risk and hedge components are identified separately. The major findings agree with the recent literature: First, the estimated coefficient of relative risk aversion appears to be positive, statistically significant, and large in magnitude. Second, changes in investment opportunities and stock market volatility affect expected returns on a portfolio significantly. And third, there is a negative correlation between the portfolio risk and hedge components. Therefore, the coefficient on the risk component of expected returns is downward biased when the hedge component is omitted from the model.},
  author       = {Mujiri, Giorgi},
  keyword      = {expected return,The risk-return relationship,the risk component,the hedge component,implied volatility.},
  language     = {eng},
  note         = {Student Paper},
  title        = {Estimating and Analyzing the Risk-Return Relationship in the Stock Market},
  year         = {2012},
}