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The impact of financial crises on the risk-return tradeoff and the leverage effect

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The impact of financial crises on the risk-return tradeoff and the leverage effect. / Christensen, Bent Jesper; Nielsen, Morten Ørregaard; Zhu, Jie.
In: Economic Modelling, Vol. 49, 2015, p. 407-418.

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaper › Journal article › Research › peer-review

Harvard

Christensen, BJ, Nielsen, MØ & Zhu, J 2015, 'The impact of financial crises on the risk-return tradeoff and the leverage effect', Economic Modelling, vol. 49, pp. 407-418. https://doi.org/10.1016/j.econmod.2015.03.006

APA

Christensen, B. J., Nielsen, M. Ø., & Zhu, J. (2015). The impact of financial crises on the risk-return tradeoff and the leverage effect. Economic Modelling, 49, 407-418. https://doi.org/10.1016/j.econmod.2015.03.006

CBE

Christensen BJ, Nielsen MØ, Zhu J. 2015. The impact of financial crises on the risk-return tradeoff and the leverage effect. Economic Modelling. 49:407-418. https://doi.org/10.1016/j.econmod.2015.03.006

MLA

Christensen, Bent Jesper, Morten Ørregaard Nielsen and Jie Zhu. "The impact of financial crises on the risk-return tradeoff and the leverage effect". Economic Modelling. 2015, 49. 407-418. https://doi.org/10.1016/j.econmod.2015.03.006

Vancouver

Christensen BJ, Nielsen MØ, Zhu J. The impact of financial crises on the risk-return tradeoff and the leverage effect. Economic Modelling. 2015;49:407-418. doi: 10.1016/j.econmod.2015.03.006

Author

Christensen, Bent Jesper ; Nielsen, Morten Ørregaard ; Zhu, Jie. / The impact of financial crises on the risk-return tradeoff and the leverage effect. In: Economic Modelling. 2015 ; Vol. 49. pp. 407-418.

Bibtex

@article{6f852522c1e141be869658fc393d24d6,
title = "The impact of financial crises on the risk-return tradeoff and the leverage effect",
abstract = "We investigate the impact of financial crises on two fundamental features of stock returns, namely, the risk-return tradeoff and the leverage effect. We apply the fractionally integrated exponential GARCH-in-mean (FIEGARCH-M) model for daily stock return data, which includes both features and allows the co-existence of long memory in volatility and short memory in returns. We extend this model to allow the financial parameters governing the volatility-in-mean effect and the leverage effect to change during financial crises. An application to the daily U.S. stock index return series from 1926 through 2010 shows that both financial effects increase significantly during crises. Strikingly, the risk-return tradeoff is significantly positive only during financial crises, and insignificant during non-crisis periods. The leverage effect is negative throughout, but increases significantly by about 50% in magnitude during financial crises. No such changes are observed during NBER recessions, so in this sense financial crises are special. Applications to a number of major developed and emerging international stock markets confirm the increase in the leverage effect, whereas the international evidence on the risk-return tradeoff is mixed. ",
keywords = "FIEGARCH-M, financial crises, financial leverage, international markets, long memory, risk-return tradeoff, stock returns, volatility feedback.",
author = "Christensen, {Bent Jesper} and Nielsen, {Morten {\O}rregaard} and Jie Zhu",
year = "2015",
doi = "10.1016/j.econmod.2015.03.006",
language = "English",
volume = "49",
pages = "407--418",
journal = "Economic Modelling",
issn = "0264-9993",
publisher = "Elsevier BV",

}

RIS

TY - JOUR

T1 - The impact of financial crises on the risk-return tradeoff and the leverage effect

AU - Christensen, Bent Jesper

AU - Nielsen, Morten Ørregaard

AU - Zhu, Jie

PY - 2015

Y1 - 2015

N2 - We investigate the impact of financial crises on two fundamental features of stock returns, namely, the risk-return tradeoff and the leverage effect. We apply the fractionally integrated exponential GARCH-in-mean (FIEGARCH-M) model for daily stock return data, which includes both features and allows the co-existence of long memory in volatility and short memory in returns. We extend this model to allow the financial parameters governing the volatility-in-mean effect and the leverage effect to change during financial crises. An application to the daily U.S. stock index return series from 1926 through 2010 shows that both financial effects increase significantly during crises. Strikingly, the risk-return tradeoff is significantly positive only during financial crises, and insignificant during non-crisis periods. The leverage effect is negative throughout, but increases significantly by about 50% in magnitude during financial crises. No such changes are observed during NBER recessions, so in this sense financial crises are special. Applications to a number of major developed and emerging international stock markets confirm the increase in the leverage effect, whereas the international evidence on the risk-return tradeoff is mixed.

AB - We investigate the impact of financial crises on two fundamental features of stock returns, namely, the risk-return tradeoff and the leverage effect. We apply the fractionally integrated exponential GARCH-in-mean (FIEGARCH-M) model for daily stock return data, which includes both features and allows the co-existence of long memory in volatility and short memory in returns. We extend this model to allow the financial parameters governing the volatility-in-mean effect and the leverage effect to change during financial crises. An application to the daily U.S. stock index return series from 1926 through 2010 shows that both financial effects increase significantly during crises. Strikingly, the risk-return tradeoff is significantly positive only during financial crises, and insignificant during non-crisis periods. The leverage effect is negative throughout, but increases significantly by about 50% in magnitude during financial crises. No such changes are observed during NBER recessions, so in this sense financial crises are special. Applications to a number of major developed and emerging international stock markets confirm the increase in the leverage effect, whereas the international evidence on the risk-return tradeoff is mixed.

KW - FIEGARCH-M, financial crises, financial leverage, international markets, long memory, risk-return tradeoff, stock returns, volatility feedback.

U2 - 10.1016/j.econmod.2015.03.006

DO - 10.1016/j.econmod.2015.03.006

M3 - Journal article

VL - 49

SP - 407

EP - 418

JO - Economic Modelling

JF - Economic Modelling

SN - 0264-9993

ER -