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    The risk-return tradeoff: A COGARCH analysis of Merton's hypothesis

    Access Status
    Fulltext not available
    Authors
    Müller, G.
    Durand, Robert
    Maller, R.
    Date
    2011
    Type
    Journal Article
    
    Metadata
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    Citation
    Müller, G. and Durand, R. and Maller, R. 2011. The risk-return tradeoff: A COGARCH analysis of Merton's hypothesis. Journal of Empirical Finance. 18: pp. 306-320.
    Source Title
    Journal of Empirical Finance
    Additional URLs
    http://www.sciencedirect.com/science/article/pii/S0927539810000812
    ISSN
    0927-5398
    URI
    http://hdl.handle.net/20.500.11937/45802
    Collection
    • Curtin Research Publications
    Abstract

    We analysed daily returns of the CRSP value weighted and equally weighted indices over 1953–2007 in order to test for Merton's theorised relationship between risk and return. Like someprevious studies we used a GARCH stochastic volatility approach, employing not only traditionaldiscrete time GARCH models but also using a COGARCH — a newly developed continuous-timeGARCH model which allows for a rigorous analysis of unequally spaced data.When a risk–returnrelationship symmetric to positive or negative returns is postulated, a significant risk premium ofthe order of 7–8% p.a., consistent with previously published estimates, is obtained. When themodel includes an asymmetry effect, the estimated risk premium, still around 7% p.a., becomesinsignificant. These results are robust to the use of a value weighted or equally weighted index.The COGARCH model properly allows for unequally spaced time series data. As a sidelight, themodel estimates that, during the period from 1953 to 2007, the weekend is equivalent, involatility terms, to about 0.3–0.5 regular trading days.

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