The Variance Risk Premium Around the World
Juan M. Londono
Federal Reserve Board of Governors
FRB International Finance Discussion Paper No. 1035
This paper investigates the variance risk premium in an international setting. First, I provide new evidence on the basic stylized facts traditionally documented for the US. I show that while the variance premiums in several other countries are, on average, positive and display significant time variation, they do not predict local equity returns. Then, I extend the domestic model in Bollerslev, Tauchen and Zhou (2009) to an international setting. In light of the qualitative implications of my model, I provide empirical evidence that the US variance premium outperforms that of all other countries in predicting local and foreign equity returns.
Number of Pages in PDF File: 52
Keywords: Variance risk premium, economic uncertainty, interdependence, international integration, co-movements, return predictability
JEL Classification: E44, F36, G12, G13, G15working papers series
Date posted: February 23, 2012
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