Stock Return Predictability and Variance Risk Premia: Statistical Inference and International Evidence
Duke University - Finance; Duke University - Department of Economics; National Bureau of Economic Research (NBER)
University of Chicago
Duke University - Department of Economics
Tsinghua University - PBC School of Finance
Recent empirical evidence suggests that the variance risk premium predicts aggregate stock market returns. We demonstrate that statistical finite sample biases cannot “explain” this apparent predictability. Further corroborating the existing evidence of the U.S., we show that country specific regressions for France, Germany, Japan, Switzerland and the U.K. result in quite similar patterns. Defining a “global” variance risk premium, we uncover even stronger predictability and almost identical cross-country patterns through the use of panel regressions. These new findings are broadly consistent with the implications from a two-country general equilibrium model explicitly incorporating the effects of time-varying economic uncertainty.
Number of Pages in PDF File: 55
Keywords: Variance risk premium, return predictability, over-lapping return regressions, international stock market returns, global variance risk
JEL Classification: C12, C22, G12, G13
Date posted: March 4, 2011 ; Last revised: August 8, 2012
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