The Global Determinants of International Equity Risk Premiums

67 Pages Posted: 20 Apr 2019 Last revised: 13 Jul 2022

See all articles by Juan M. Londono

Juan M. Londono

Board of Governors of the Federal Reserve System

Nancy R. Xu

Boston College, Carroll School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: July 12, 2022

Abstract

We examine the commonality in international equity risk premiums by linking empirical evidence for the international stock return predictability of U.S. downside and upside variance risk premiums (DVP and UVP, respectively) with implications from an international asset pricing framework which features asymmetric macroeconomic and risk aversion shocks. We find that DVP and UVP predict international stock returns through U.S. bad and good macroeconomic uncertainties, respectively. 60% to 80% of the dynamics of the global equity risk premium for horizons under seven months are driven by U.S. economic uncertainty, whereas U.S. risk aversion appears more relevant for longer horizons. The predictability patterns of DVP and UVP vary across countries depending on their financial and economic exposures to global shocks. For those with higher economic exposures, investors demand a higher compensation for bad macroeconomic uncertainty but a lower compensation for good macroeconomic uncertainty, whereas the compensation for bad macroeconomic uncertainty decreases with financial exposure.

Keywords: Downside variance risk premium, Upside variance risk premium, International stock markets, Asymmetric state variables, Stock return predictability

JEL Classification: F36, G12, G13, G15

Suggested Citation

Londono-Yarce, Juan-Miguel and Xu, Nancy R., The Global Determinants of International Equity Risk Premiums (July 12, 2022). Available at SSRN: https://ssrn.com/abstract=3366592 or http://dx.doi.org/10.2139/ssrn.3366592

Juan-Miguel Londono-Yarce

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Nancy R. Xu (Contact Author)

Boston College, Carroll School of Management ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

HOME PAGE: http://www.nancyxu.net

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