Expected stock returns and variance risk premia

By Tim Bollerslev, Hao Zhou. 2007

1,358 citations recorded by the source corpus.

We find that the difference between implied and realized variances, or the variance risk premium, is able to explain more than fifteen percent of the ex-post time series variation in quarterly excess returns on the market portfolio over the 1990 to 2005 sample period, with high (low) premia predicting high (low) future returns. The magnitude of the return predictability of the variance risk premium easily dominates that afforded by standard predictor variables like the P/E ratio, the dividend yield, the default spread, and the consumption-wealth ratio (CAY). Moreover, combining the variance risk premium with the P/E ratio results in an R^2 for the quarterly returns of more than twenty-five percent. The results depend crucially on the use of \\"model-free\\", as opposed to standard Black-Scholes, implied variances, and realized variances constructed from high-frequency intraday, as opposed to daily, data. Our findings suggest that temporal variation in risk and risk-aversion both play an important role in determining stock market returns.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/b13035bd98a32791cfa0ec209676cb3346243c96

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Citations in the corpus

Tail Risk and Asset Prices (2014, positive): “Examples of the option-based approach include Bakshi, Kapadia, and Madan (2003), who study risk-neutral skewness and kurtosis, Bollerslev, Tauchen, and Zhou (2009), who examine how the variance risk premium relates to the equity premium, and Backus, Chernov, and Martin (2011) and Gao and Song…”
Predictability of Returns and Cash Flows (2011, neutral): “…the book-to-market ratio (Kothari and Shanken, 1997; Pontiff and Schall, 1998), the dividend-payout ratio (Lamont, 1998), the variance risk premium (Bollerslev et al., 2009; Drechsler and Yaron, 2010), a linear combination of dp ratios of various stock portfolios (Kelly and Pruitt, 2010); among…”
Uncertainty and Business Cycles: Exogenous Impulse or Endogenous Response? (2015, neutral): “But some researchers have argued that uncertainty dampens the economy through its influence on financial markets (e.g., Gilchrist, Sim, and Zakrajsek (2010)) or through sources of uncertainty specific to financial markets (e.g., Bollerslev, Tauchen, and Zhou (2009)).”
Forecasting with Option-Implied Information (2012, neutral): “Bollerslev, Tauchen, and Zhou (2009), Bekaert, Hoerova, and Lo Duca (2010), and Zhou (2010) find strong evidence that the variance risk premium, which is the difference between implied variance and realized variance, can predict the equity risk premium.”
Nonlinearity and Flight‐to‐Safety in the Risk‐Return Trade‐Off for Stocks and Bonds (2019, positive): “…– an effect that persists even with the inclusion of standard forecasting variables like the BAA/10-year Treasury default spread (DEF), the variance risk premium (VRP) following Bollerslev, Tauchen, and Zhou (2009), the 10-year/3-month Treasury Term Spread (TERM), and the (log) dividend yield (DY).”
HAR Modeling for Realized Volatility Forecasting (2012, positive): “…extension of this model to forecast the volatility of stock prices, foreign exchange rates and bond prices; [31] implement it for risk management with VaR measures; [20] use it to analyze the risk-return tradeoff; [18] use it to study the relation between intraday serial correlation and volatility.”
Variance Risk Premiums and the Forward Premium Puzzle (2012, positive): “Following the convention for the stock variance risk premium (V Pt) (Bollerslev, Tauchen, and Zhou, 2009; Drechsler and Yaron, 2011), we define the foreign exchange (forex) or currency variance risk premium of the returns in U.S. dollars per unit of foreign currency as XV Pt ≡ EQt ( σ2c,t+1 ) − EPt…”
World Asset Markets and the Global Financial Cycle (2015, background): “Bollerslev et al. (2009) where variance risk premia are measured as the difference between implied (expectation under risk neutral probability) and realised variances.”
Tails, Fears and Risk Premia (2010, positive): “…underlying returns, within the context of various equilibrium based pricing models; see, e.g., Bakshi and Kapadia (2003), Bakshi and Madan (2006), Bollerslev et al. (2009), Carr and Wu (2009), Drechsler and Yaron (2008), Eraker (2008), and Todorov (2010). risk premium is directly attributable to…”
A tale of two option markets: Pricing kernels and volatility risk ☆ (2014, neutral): “Moreover, we document a U-shaped pricing kernel of volatility, which cannot be captured by standard models with volatility risk, such as Bollerslev et al. (2009) and Drechsler and Yaron (2011).”
A Comprehensive Look at Financial Volatility Prediction by Economic Variables (2011, positive): “Volatility-based measures have also been shown to predict future stock market returns (see e.g. Bollerslev, Tauchen, and Zhou, 2009).”
Risk and return: Long-run relations, fractional cointegration, and return predictability $ (2013, result): “These results are also consistent with the monthly return regressions in Bollerslev, Tauchen, and Zhou (2009), which suggest that the return predictability of the variance risk premium is maximized at a four-month horizon.”
The Skew Risk Premium in the Equity Index Market (2013, neutral): “, see Bollerslev et al. (2009). Some papers however extrapolate volatilities outside the minimum and maximum strike prices (e.”
Realizing smiles: Options pricing with realized volatility (2013, positive): “Two exceptions are Comte, Coutin, and Renault (2003), who employ a fractional stochastic volatility model, and Carr and Wu (2003), who apply alpha-stable processes to slow down the central limit theorem and obtain negative skewness and excess kurtosis for long-maturity options. Moreover, a growing s”