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Variance risk premium and equity returns
Research in International Business and Finance, 2018 Abstract This study contributes to the age-old question of whether stock market returns are predictable by investigating the relationship of variance risk premium and equity returns. The volatilities derived from options prices typically exceed the corresponding subsequent realized volatilities of the underlying asset, suggesting that investors ...
Athanasios P Fassas +1 more
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Review of Financial Studies, 2008
We propose a direct and robust method for quantifying the variance risk premium on financial assets. We show that the risk-neutral expected value of return variance, also known as the variance swap rate, is well approximated by the value of a particular portfolio of options.
Peter Carr, Liuren Wu
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We propose a direct and robust method for quantifying the variance risk premium on financial assets. We show that the risk-neutral expected value of return variance, also known as the variance swap rate, is well approximated by the value of a particular portfolio of options.
Peter Carr, Liuren Wu
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Inference for variance risk premium
China Finance Review International, 2020PurposeWith the presence of pricing errors, the authors consider statistical inference on the variance risk premium (VRP) and the associated implied variance, constructed from the option prices and the historic returns.Design/methodology/approachThe authors propose a nonparametric kernel smoothing approach that removes the adverse effects of pricing ...
Shuang Zhang, Song Xi Chen, Lei Lu
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Variance Risk Premiums in Emerging Markets
SSRN Electronic Journal, 2018We provide first time the emerging market variance risk premiums (EMVRP) from 2006 to 2019, based on nine emerging stocks and options markets---Brazil, China, India, South Korea, Mexico, Poland, Russia, South Africa, and Taiwan. The EMVRP significantly predicts international stock returns and currency appreciation rates, especially for horizons longer ...
Fang Qiao +3 more
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Changes in Risk Factor Disclosures and the Variance Risk Premium
SSRN Electronic Journal, 2022ABSTRACT This paper examines how changes in risk disclosures affect uncertainty about risk. We measure changes in risk disclosures using the addition and removal of individual risk factors to firms’ 10-K filings, identified via textual analysis of the risk factors section.
Matthew R. Lyle +2 more
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The Pricing of Variance of Variance Risk in Cross-Sectional Equity Premium and Variance Premium
SSRN Electronic Journal, 2013Based on an extended general equilibrium long-run risks (LRR) model, this paper examines the pricing of market variance of variance risk in the cross-sectional stock returns and variance premium. We calibrate the economic dynamics with a market-based three-factor model, in which the equilibrium market return, market variance, and market variance of ...
Te-Feng Chen, San-Lin Chung
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Optimism and the variance risk premium
Finance Research LettersWe show that market optimism from a representative agent asset pricing model with probability weighting complements and restores the variance risk premium (VRP) in predicting the equity premium. We find the VRP fails to predict stock returns in-sample and out-of-sample. However, introducing optimism derived from a NEO-EU framework along with a positive
Mehran Azimi +3 more
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Time-varying uncertainty and variance risk premium
Journal of Macroeconomics, 2021Abstract This paper extends the AK production model in Pindyck and Wang (2013) into a more general setting in which the volatility of capital stock is stochastic and driven by shocks. After solving the equilibrium, the fundamental shocks are embedded into the stock price and the leverage effect is contributed from three distinct channels.
Xinfeng Ruan, Jin E. Zhang
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Modeling Variance Risk Premium
2017The bias between the expected realized variance under the historical measure and the risk neutral probability introduces the concept of the variance risk premium (VRP). Our work introduced a probabilistic modeling of the VRP via a parametric class of stochastic volatility models which incorporates the nonlinear class.
Kossi Gnameho, Juho Kanniainen, Ye Yue
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Firm Fundamentals and Variance Risk Premiums
SSRN Electronic Journal, 2015We develop a tractable valuation model which shows that future asset returns are predictably related to two firm characteristics, book-to-market (bm) and return on equity (roe), because these measures carry information about priced risk. The model we derive predicts a negative relation between expected variance returns embedded in option prices ...
Matthew R. Lyle, James P. Naughton
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