Stock return predictability and variance risk premia: statistical inference and international evidence

Tim Bollerslev, James Marrone, Lai Xu and Hao Zhou

No 2011-52, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Recent empirical evidence suggests that the variance risk premium, or the difference between risk-neutral and statistical expectations of the future return variation, predicts aggregate stock market returns, with the predictability especially strong at the 2-4 month horizons. We provide extensive Monte Carlo simulation evidence that statistical finite sample biases in the overlapping return regressions underlying these findings can not ``explain\" this apparent predictability. Further corroborating the existing empirical evidence, we show that the patterns in the predictability across different return horizons estimated from country specific regressions for France, Germany, Japan, Switzerland and the U.K. are remarkably similar to the pattern previously documented for the U.S. Defining a \"global\" variance risk premium, we uncover even stronger predictability and almost identical cross-country patterns through the use of panel regressions that effectively restrict the compensation for world-wide variance risk to be the same across countries. Our findings are broadly consistent with the implications from a stylized two-country general equilibrium model explicitly incorporating the effects of world-wide time-varying economic uncertainty.

Keywords: Stocks - Rate of return; Risk (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-fmk, nep-for and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (30)

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Journal Article: Stock Return Predictability and Variance Risk Premia: Statistical Inference and International Evidence (2014)
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