The Correlation Risk Premium: International Evidence

45 Pages Posted: 26 Nov 2018 Last revised: 6 Jan 2022

See all articles by Gonçalo Faria

Gonçalo Faria

Catholic University of Portugal (UCP) - School of Economics and Management and CEGE

Robert Kosowski

Imperial College Business School; CEPR (Centre for Economic Policy Research); University of Oxford, Oxford-Man Institute of Quantitative Finance

Tianyu Wang

Tsinghua University, School of Economics and Management

Multiple version iconThere are 2 versions of this paper

Date Written: December 18, 2021

Abstract

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

Faria, Gonçalo and Kosowski, Robert and Wang, Tianyu, The Correlation Risk Premium: International Evidence (December 18, 2021). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3276601 or http://dx.doi.org/10.2139/ssrn.3276601

Gonçalo Faria

Catholic University of Portugal (UCP) - School of Economics and Management and CEGE ( email )

Universidade Católica Portuguesa
Rua Diogo Botelho 1327
Porto, 4169-005
Portugal

Robert Kosowski (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom
+442075943294 (Phone)

HOME PAGE: http://www3.imperial.ac.uk/people/r.kosowski

CEPR (Centre for Economic Policy Research) ( email )

London
United Kingdom

HOME PAGE: http://www.cepr.org/

University of Oxford, Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

Tianyu Wang

Tsinghua University, School of Economics and Management ( email )

Shuangqing Road 30
Haidian District
Beijing, Beijing 100084
China

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