The Variance Risk Premium in Equilibrium Models

Geert Bekaert, Eric Engstrom and Andrey Ermolov

No 27108, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The equity variance risk premium is the expected compensation earned for selling variance risk in equity markets. The variance risk premium is positive and shows moderate persistence. High variance risk premiums coincide with the left tail of the consumption growth distribution shifting down. These facts, together with a positive, yet moderate, difference between the risk-neutral entropy and variance of the aggregate market return, refute the bulk of the extant consumption-based asset pricing models. We introduce a tractable habit model that does fit the data. In the model, the variance risk premium depends positively (negatively) on “bad” (“good”) consumption growth uncertainty.

JEL-codes: E44 G12 G13 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-mac, nep-ore, nep-rmg and nep-upt
Note: AP
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Citations: View citations in EconPapers (2)

Published as Geert Bekaert & Eric Engstrom & Andrey Ermolov, 2023. "The Variance Risk Premium in Equilibrium Models," Review of Finance, vol 27(6), pages 1977-2014.

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