Stock Return Predictability and Variance Risk Premia: Statistical Inference and International Evidence

55 Pages Posted: 4 Mar 2011 Last revised: 8 Aug 2012

Tim Bollerslev

Duke University - Finance; Duke University - Department of Economics; National Bureau of Economic Research (NBER)

James V Marrone

University of Chicago

Lai Xu

Independent

Hao Zhou

Tsinghua University - PBC School of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: August 2012

Abstract

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.

Keywords: Variance risk premium, return predictability, over-lapping return regressions, international stock market returns, global variance risk

JEL Classification: C12, C22, G12, G13

Suggested Citation

Bollerslev, Tim and Marrone, James V and Xu, Lai and Zhou, Hao, Stock Return Predictability and Variance Risk Premia: Statistical Inference and International Evidence (August 2012). Available at SSRN: https://ssrn.com/abstract=1775249 or http://dx.doi.org/10.2139/ssrn.1775249

Tim Bollerslev

Duke University - Finance ( email )

Durham, NC 27708-0120
United States
919-660-1846 (Phone)
919-684-8974 (Fax)

Duke University - Department of Economics

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

James V Marrone

University of Chicago ( email )

1126 E 59th St
Chicago, IL 60637
United States

Lai Xu

Independent

No Address Available

Hao Zhou (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China
86-10-62790655 (Phone)

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