Variance risk premium and equity returns
Athanasios Fassas and
Stephanos Papadamou ()
Research in International Business and Finance, 2018, vol. 46, issue C, 462-470
This study contributes to the age-old question of whether stock market returns are predictable by investigating the relationship of variance risk premium and equity returns. The volatilities derived from options prices typically exceed the corresponding subsequent realized volatilities of the underlying asset, suggesting that investors require additional compensation for bearing volatility risk. Therefore, an implied volatility index reflects not only the expected stock market uncertainty, but also investors’ risk aversion. This risk aversion element is part of investors’ compensation for bearing equity risk and can be measured by the variance risk premium.
Keywords: Variance risk premium; Risk aversion; Stock market returns predictability (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:46:y:2018:i:c:p:462-470
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