Expected stock returns and variance risk premia

Published

Journal Article

Motivated by the implications from a stylized self-contained general equilibrium model incorporating the effects of time-varying economic uncertainty, we show that the difference between implied and realized variation, or the variance risk premium, is able to explain a nontrivial fraction of the time-series variation in post-1990 aggregate stock market returns, with high (low) premia predicting high (low) future returns. Our empirical results depend crucially on the use of "model-free," as opposed to Black-Scholes, options implied volatilities, along with accurate realized variation measures constructed from high-frequency intraday as opposed to daily data. The magnitude of the predictability is particularly strong at the intermediate quarterly return horizon, where it dominates that afforded by other popular predictor variables, such as the P/E ratio, the default spread, and the consumption-wealth ratio.

Full Text

Duke Authors

Cited Authors

  • Bollerslev, T; Tauchen, G; Zhou, H

Published Date

  • November 1, 2009

Published In

Volume / Issue

  • 22 / 11

Start / End Page

  • 4463 - 4492

Electronic International Standard Serial Number (EISSN)

  • 1465-7368

International Standard Serial Number (ISSN)

  • 0893-9454

Digital Object Identifier (DOI)

  • 10.1093/rfs/hhp008

Citation Source

  • Scopus