The intertemporal risk-return relationship: Evidence from international markets

Abstract

This paper examines the intertemporal capital asset pricing (Merton, 1973) for industry portfolio returns of 14 international markets. Using different multivariate GARCH models to estimate time-varying conditional covariances between industry excess returns and market excess returns by controlling for financial market volatility variables and the Fama–French–Carhart factors, we find positive evidence to support the tradeoff between industry excess return and the covariance risk for all advanced markets (except Germany), all Asian markets, and Argentina in Latin American markets. The evidence suggests that the positive risk-return relationship is more pronounced during the tranquil period.