TY  - JOUR
AU  - Ghysels,Eric
AU  - Santa-Clara,Pedro
AU  - Valkanov,Rossen
TI  - There is a Risk-Return Tradeoff After All
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10913
PY  - 2004
Y2  - November 2004
UR  - http://www.nber.org/papers/w10913
L1  - http://www.nber.org/papers/w10913.pdf
N1  - Author contact info:
Eric Ghysels
Department of Economics
University of North Carolina-Chapel Hill
Gardner Hall, CB 3305
Chapel Hill, NC 27599-3305
Tel: 919/966-5325
Fax: 919/966-4886
E-Mail: eghysels@unc.edu

Pedro Santa-Clara
Faculdade de Economia
Universidade Nova de Lisboa
Rua Marques de Fronteira, 20
1099-038 LISBOA
PORTUGAL
Tel: +351-91-493-4313
E-Mail: psc@fe.unl.pt

Rossen Valkanov
UC, San Diego
E-Mail: rvalkanov@ucsd.edu
AB  - This paper studies the ICAPM intertemporal relation between the conditional mean and the conditional variance of the aggregate stock market return. We introduce a new estimator that forecasts monthly variance with past daily squared returns -- the Mixed Data Sampling (or MIDAS) approach. Using MIDAS, we  find that there is a significantly positive relation between risk and return in the stock market. This finding is robust in subsamples, to asymmetric specifications of the variance process, and to controlling for variables associated with the business cycle. We compare the MIDAS results with tests of the ICAPM based on alternative conditional variance specifications and explain the conflicting results in the literature. Finally, we offer new insights about the dynamics of conditional variance.
ER  -