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Expected Stock Returns and Variance Risk Premia

Tim Bollerslev, George Tauchen (george.tauchen@duke.edu) and Hao Zhou

The Review of Financial Studies, 2009, vol. 22, issue 11, 4463-4492

Abstract: 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. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Date: 2009
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Citations: View citations in EconPapers (775)

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Working Paper: Expected Stock Returns and Variance Risk Premia (2008) Downloads
Working Paper: Expected Stock Returns and Variance Risk Premia (2007) Downloads
Working Paper: Expected stock returns and variance risk premia (2006) Downloads
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