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I. Introduction
Theoretically, risk and return play important roles in the capital asset pricing model (CAPM). Lots of empirical studies focussed on the dynamic relationship between risk and return of the mature stock markets in industrialized countries, while there is a lack of similar literature for the emerging stock markets, especially for the Chinese stock markets. And the results of early studies on the risk-return relationship in China are still ambiguous. This paper intends to investigate the risk-return tradeoff in the Chinese emerging stock markets with a much longer sample including daily, weekly and monthly market return series.
The remainder of this paper is organized as follows. Section II is the literature review. Section III discusses the econometric methodology. Section IV introduces the data. Section V reports the empirical results and finally, Section VI concludes the paper.
II. Literature review
Asset pricing models always imply a positive relationship between risk and return under the assumption of investor risk aversion, as summarized in Lettau and Ludvigson (2003). In Sharpe-Lintner-Mossin mean-variance equilibrium of exchange, the expected excess return from holding an asset is proportional to the covariance of its return with the market portfolio (its "[beta] "), as a proxy of risk. Merton (1973) proposed an intertemporal capital asset pricing model (ICAPM) and suggested that the conditional expected excess return on the stock market should vary positively with the market's conditional variance, as the proxy of risk. This risk-return tradeoff is so fundamental in financial economics and usually is described as the "first fundamental law of finance" (Ghysels et al. , 2005).
Accordingly, numerous empirical studies have been conducted to investigate the risk-return relation by using data from different countries or different stock markets. However, the results are ambiguous and the empirical studies available do not provide any conclusive evidence on this relationship over time. French et al. (1987), Baillie and DeGennaro (1990), Campbell and Hentschel (1992) and Goyal and Santa-Clara (2003) did find a positive albeit mostly insignificant relation between the conditional variance and the conditional expected return. Xing and Howe (2003) documented a significant positive relationship between stock returns and the variance of returns in the UK stock markets with a bivariate GARCH-M model. Bali and Peng (2006) also found a positive and...