Risk-return tradeoff in international stock returns: Skewness and business cycles

Abstract

The fundamental risk-return relation with a flexible regime-switching model is examined by combining the impact of skewness and business cycle regimes in stock returns. The key methodological and empirical findings point out the need for our highly nonlinear and non-Gaussian model to get a reliable picture of the risk-return relationship. With an international dataset of major countries to global financial markets, we find that accounting especially for skewness patterns leads to the expected positive risk-return relation, which is importantly also maintained over different business cycle conditions.