The intertemporal relationship between risk and return with dynamic conditional correlation and time -varying beta

Document Type : Research Paper

Authors

1 Ph.D., Financial Economics, University of Tehran, Iran

2 Assistant Prof., Economics Department, Allameh Tabatabaee University, Tehran, Iran

Abstract

The current paper examines intertemporal capital asset pricing model in Iran’s Stock Market. Dynamic conditional correlation was used to estimate conditional variance and covariance portfolios with market returns. Time varying beta is estimated by Kalman Filter method. Based on the obtained results, risk aversion coefficients were between 0.013 and 0.28 and the average was 0.20. Significance of risk aversion and insignificance of intercepts revealed that there is ICAPM in Iran’s Stock Market.  The result also showed that assets with high correlation with market conditional volatilities have low expected returns in the next transaction period. In addition, assets having high correlation with exchange rate growth are induced by additional risk premium in exchange rate risks and will have high expected returns in the next transaction period.

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References

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Financial Research Journal
Volume 17, Issue 1 - Serial Number 1
Spring & Summer
April 2015
Pages 1-20

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