Using ridge regressions, we introduce a novel methodology to estimate a time-varying version of the market risk-return trade-off. Our model improves available techniques since it allows for flexible patterns in the relationship and does not need a long span of data or additional state variables to accurately estimate the trade-off. We find that this relationship is positive during almost all the sample but it occasionally turns out negative during deep recessions. Our results may help solve the controversy in the previous literature. Investors, policymakers, and regulators must monitor this relationship to optimise investment, manage risks, and prevent financial instability.

中文翻译：

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通过岭回归揭示风险-回报权衡


使用岭回归，我们引入了一种新的方法来估计市场风险-回报权衡的时变版本。我们的模型改进了可用的技术，因为它允许在关系中使用灵活的模式，并且不需要很长的数据跨度或其他状态变量来准确估计权衡。我们发现，这种关系在几乎所有样本中都是正的，但在深度衰退期间偶尔会变成负的。我们的结果可能有助于解决以前文献中的争议。投资者、政策制定者和监管机构必须监控这种关系，以优化投资、管理风险并防止金融不稳定。