León, A., J, Nave and G. Rubio
Journal of Banking and Finance – 31 (2007) 395-512

Keywords: Risk–return trade-offMultivariate MIDASIntegration of financial markets

Abstract: We employ MIDAS (mixed data sampling) to study the risk–expected return trade-off in several European stock indices. Using MIDAS, we report that in most indices there is a significant positive relationship between risk and expected return. This strongly contrasts with the result we obtain when we employ both symmetric and asymmetric GARCH models for conditional variance. We also find that asymmetric specifications of the variance process within the MIDAS framework improve the relationship between risk and expected return. As an additional application, we analyze the extent to which European stock markets are integrated, which is a particularly relevant issue, especially following the launch of the Euro in January 1999. Finally, we propose a bivariate MIDAS specification to test the pricing significance of the hedging component within an intertemporal risk–return trade-off with multiple European market indices.