The Correlation Risk Premium: International Evidence
45 Pages Posted: 26 Nov 2018 Last revised: 6 Jan 2022
Date Written: December 18, 2021
In this paper we carry out a cross-country analysis of the correlation risk premium. We examine the statistical properties of the implied and realized correlation in European equity markets and relate the resulting premium to US equity market correlation risk and a global correlation risk premium. We find evidence of strong co-movement of correlation risk premiums in European and US equity markets. Our results support the existence of a strong empirical relationship between the global correlation risk premium and international equity market option returns. We document the dependence of the correlation risk premium on macroeconomic uncertainty and related variables.
Keywords: correlation risk premium, implied correlation, realized correlation, variance risk premium, international equity options
JEL Classification: G10, G12, G13
Suggested Citation: Suggested Citation