The variance risk premium and fundamental uncertainty

Christian Conrad and Karin Loch

Economics Letters, 2015, vol. 132, issue C, 56-60

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 US 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)
JEL-codes: C53 C58 E32 G12 G17 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:132:y:2015:i:c:p:56-60

DOI: 10.1016/j.econlet.2015.04.006

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