Risk-Return Tradeoff: Evidence of Quantile Regression Models

In this research risk-return tradeoff examined in scope of ex post facto studies, using OLS Model and Quantile regression Model. By using of daily returns of six indexes of Tehran Stock Exchange (TSE), linear relation between excess return and risk examined that evidence indicates significant (positive) tradeoff between excess return and risk. However, results of Quantile regression model show that risk-return relation is different in returns distribution and vary from negative relation in the lower quantiles to positive relation in the upper quantiles. Linear regression model and Quantile regression model show also that unexpected variance can explain excess return at least similar to expected variance. The results can also be interpreted with both insight of standard finance and insight of behavioral finance. In standard finance area, risk-return positive relation that exists in upper quintiles is consistent with long run growth of economy. Moreover, negative relation between return and risk in lower quintiles implies more uncertainty and as a result causing stock returns to fall. In behavioral finance area, regime-dependent behavior of slope coefficients is consistent with prediction of prospect theory of investor’s behaviors around the reference point.