ABSTRACT
In his seminal paper, Merton (1973) presents a theoretical analysis of the expected stock return in relation to risk. He postulates a positive relation between expected excess returns and risk. Following Merton’s (1973, 1980) theoretical prediction, voluminous studies have been devoted to investigating this risk-return hypothesis. For instance, French et al. (1987) find evidence that the expected market return is positively related to the predicted volatility of stock returns. Similar findings are shown in the research papers by Baillie and DeGennaro (1990), Ghysels et al. (2005), and Bali and Peng (2006), among others.
