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Revisiting the Risk-return Relation in the Chinese Stock Market:Decomposition of Risk Premium and Volatility Feedback Effect


E2016003                                                         March 2016
Hao Liu  Shihan Shen  Tianyi Wang  Zhuo Huang


The empirical results of the risk-return relationship are mixed for both mature and merging markets. In this paper, we develop a new volatility model to revisit the risk-return relation of the aggregate stock market index by extending the Realized GARCH model of Hansen et al. (2012) with the Wang and Yang (2013) framework, in which the overall risk-return relation is decomposed into a risk premium and a volatility feedback effect. An empirical analysis of three major Chinese stock indices reveals positive risk premium and negative volatility feedback effect, and those findings are stable across different markets and sub-samples. However, their relative magnitudes differ between markets and varies through time.

Keywords: Risk-return relation, Realized GARCH, Volatility feedback, Risk, premium

JEL: C13, C22, C51

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