The Variance Risk Premium and Fundamental Uncertainty

Christian Conrad and Karin Loch

No 583, Working Papers from University of Heidelberg, Department of Economics

Abstract: We propose a new measure of the expected variance risk premium that is based on a forecast of the conditional variance from a GARCH-MIDAS model. We find that the new measure has strong predictive ability for future U.S. aggregate stock market returns and rationalize this result by showing that the new measure effectively isolates fundamental uncertainty as the factor that drives the variance risk premium.

Keywords: Variance risk premium; return predictability; VIX; GARCH-MIDAS; economic uncertainty; vol-of-vol (search for similar items in EconPapers)
Date: 2015-02-27
New Economics Papers: this item is included in nep-for, nep-mfd, nep-rmg and nep-upt
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