Variance Risk Premia, Asset Predictability Puzzles, and Macroeconomic Uncertainty

50 Pages Posted: 7 May 2009 Last revised: 24 Aug 2012

See all articles by Hao Zhou

Hao Zhou

Tsinghua University - PBC School of Finance

Multiple version iconThere are 3 versions of this paper

Date Written: May 2009

Abstract

This paper presents predictability evidence of the implied-expected variance difference, or variance risk premium, for financial market risk premia: (1) the variance difference measure predicts a positive risk premium across equity, bond, currency, and credit markets; (2) such a short-run forecastability peaks at one month horizon and dies out as horizon rises; (3) the short-run predictability is complementary to that of the standard predictor variables — P/E ratio, forward rate, interest differential, and short rate. These findings are justifiable by a general equilibrium model that incorporates stochastic economic uncertainty and recursive utility function. Within such a framework, the negative volatility risk premium implied from option prices is internally consistent with the positive variance risk premium embedded in underlying assets.

Keywords: Macroeconomic uncertainty, asset return predictability, variance risk premia, recursive utility function.

JEL Classification: G12, G13, G14

Suggested Citation

Zhou, Hao, Variance Risk Premia, Asset Predictability Puzzles, and Macroeconomic Uncertainty (May 2009). Available at SSRN: https://ssrn.com/abstract=1400049 or http://dx.doi.org/10.2139/ssrn.1400049

Hao Zhou (Contact Author)

Tsinghua University - PBC School of Finance ( email )

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