Testing the risk-return tradeoff in the emerging market of Jordan: What role for financial crises?

Abstract

This study investigates the risk-return relationship at sector level in the emerging market of Jordan (ASE) over the period 1999-2014. The results of an unconditional test with a structural breakpoint show that the relationship is not stable, owing to the effect of the recent global financial crisis (GFC). The conditional test proposed by Pettengill et al. (1995) shows that after the GFC, lower risk is compensated for by a lower return. This indicates that there are more risk-averse investors than risk-takers, which does not help to boost the overall market performance. The implications for diversification strategies suggest that, unless higher risk is rewarded by higher return, regional and international investors will not be encouraged to divert their channels of capital to the ASE. The results also carry signs warning policymakers after the recent market improvements, which were intended to attracting FDI inflows. More incentives are required to encourage risk-takers to incline their capital to flow toward the ASE market. Copyright 2016 Inderscience Enterprises Ltd.