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 countries are, on average, positive and display significant time variation, they do not predict local equity returns in countries other than the US. 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 outperforms all other countries' variance premiums in predicting local and foreign equity returns.

Keywords: variance risk premium, economic uncertainty, interdependence, international integration, comovements, return predictability.

JEL Classification: E44, F36, G12, G13, G15