The Global Determinants of International Equity Risk Premiums

61 Pages Posted: 20 Apr 2019 Last revised: 17 Feb 2023

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: February 14, 2023

Abstract

We examine the commonalities in international equity risk premiums by linking empirical evidence for the ability of U.S. downside and upside variance risk premiums (DVP and UVP, respectively) to predict international stock returns with implications from an empirical model featuring asymmetric economic uncertainty and risk aversion. 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 economic uncertainty, whereas risk aversion appears more relevant for longer horizons. The predictability patterns of DVP and UVP vary across countries depending on those countries’ financial and economic exposure to global shocks. In those with higher economic exposure, investors demand higher compensation for bad macroeconomic uncertainty but lower compensation for good macroeconomic uncertainty, whereas the compensation for bad macroeconomic uncertainty is lower for countries with high 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, Juan M. and Xu, Nancy R., The Global Determinants of International Equity Risk Premiums (February 14, 2023). Available at SSRN: https://ssrn.com/abstract=3366592 or http://dx.doi.org/10.2139/ssrn.3366592

Juan M. Londono

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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