Expected returns and volatility in european stock markets

The type of return generating process we test here on three European markets are GARCH and AR-GARCH in mean models with innovations that have either normal or student-t densities with time dependant variances. These models are appealing in that they estimate time varying volatility in disturbances of stock returns series and ex-ante relationship between stock returns and volatility. Our results indicate that there is no statistically significant coefficient estimates for the volatility in the mean equation and that variance might not be appropriate as a measure of risk. Other proxies for risk should then be searched for.