The Variance Risk Premium Around the World

Abstract:     
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, G15

working papers series