E2016003                                                         March 2016
Hao Liu　 Shihan Shen 　Tianyi Wang　 Zhuo Huang

Abstract:

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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