Quantile Risk–Return Trade-Off

Nektarios Aslanidis, Charlotte Christiansen*, Christos S. Savva

*Corresponding author for this work

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Abstract

We investigate the risk–return trade-off on the US and European stock markets. We investigate the non-linear risk–return trade-off with a special eye to the tails of the stock returns using quantile regressions. We first consider the US stock market portfolio. We find that the risk–return trade-off is significantly positive at the upper tail (0.9 quantile), where the upper tail is large positive excess returns. The positive trade-off is as expected from asset pricing models. For the lower tail (0.1 quantile), that is for large negative stock returns, the trade-off is significantly negative. Additionally, for the median (0.5 quantile), the risk–return trade-off is insignificant. These results are recovered for the US industry portfolios and for Eurozone stock market portfolios.

Original languageEnglish
Article number249
JournalJournal of Risk and Financial Management
Volume14
Issue6
Number of pages14
DOIs
Publication statusPublished - Jun 2021

Keywords

  • VIX
  • quantile regressions
  • risk–return trade-off
  • stock markets

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