Thanks Sidharth and Wildi for your replies.

However going through the replies from Sidharth and Wildi, I am little more
confused!!!

>From Sidharth's pointer it seems to me like, the estimate of 'k' ***should
be positive*** (i.e. higher risk -> higher return). However Wildi says
that, from conditional volatility point of view this may not be the case.

However the simulation study in Sidharth's pointer looks to be more
tangible. Therefore I think my insignificant 'k' estimate is due to
comparatively small sample only (at least 4,000 observations means near to
16 years of data, while I have 10 years of data).

Is there any inaccuracy in my above statement?

Thanks and regards,


On Sun, Jun 30, 2013 at 9:25 AM, sidharth mallik <htrahdis@gmail.com> wrote:

> also, the methods of estimation should be rigorously checked again.
> please see this link : http://mahalanobis.twoday.net/stories/2684143/.
> parameter estimation for these models may not be as easy as a simple
> GARCH model.
>
> On 6/30/13, Wildi Marc (wlmr) <wlmr@zhaw.ch> wrote:
> > This is a classic topic of/for confusion:
> >
> > -Garch-in-Mean (as you use) is not related to Markowitz: the former
> > (Garch-in-Mean) emphasizes longitudinal dynamics whereas Markowitz
> > emphasizes cross-sectional `diversity'.
> >
> > -Typically, the link between return and volatility in the Garch-in-mean
> is
> > negative. This means: high-volatility is associated with draw-downs
> > (negative returns): asymmetry of markets.
> >
> > -In contrast, in a Markowitzian cross-sectional perspective the link
> between
> > vola and return is positive: higher returns offset higher risk.
> >
> > Do not stumble into this trap...
> >
> > Marc
> >
> >
> >
> >
> > ________________________________________
> > Von: r-sig-finance-bounces@r-project.org
> > [r-sig-finance-bounces@r-project.org]&quot; im Auftrag von
> &quot;Christofer
> > Bogaso [bogaso.christofer@gmail.com]
> > Gesendet: Samstag, 29. Juni 2013 20:49
> > An: r-sig-finance@r-project.org
> > Betreff: [R-SIG-Finance] Risk return analysis
> >
> > Hello again,
> >
> > I have estimated a garch model with following specification:
> >
> > r[t] = mu + k * sigma[t] + epsilon[t]
> >
> > sigma[t] ~ garch(1,1)
> >
> > However I see that estimate of k is positive but insignificant.
> >
> > My question what does it mean? Does it mean that, for that asset people
> are
> > not risk adverse? they do not demand higher return for higher risk?
> >
> > Or it just some noise?
> >
> > I am using daily log-return for 10 years.
> >
> > Thanks for your help.
> >
> >         [[alternative HTML version deleted]]
> >
> > _______________________________________________
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> > -- Also note that this is not the r-help list where general R questions
> > should go.
> >
> > _______________________________________________
> > R-SIG-Finance@r-project.org mailing list
> > https://stat.ethz.ch/mailman/listinfo/r-sig-finance
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> > -- Also note that this is not the r-help list where general R questions
> > should go.
> >
>

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