The Global Determinants of International Equity Risk Premiums

Juan M. Londono () and Nancy R. Xu ()
Additional contact information
Juan M. Londono: Division of International Finance, Federal Reserve Board, Washington, District of Columbia 20551
Nancy R. Xu: Carroll School of Management, Boston College, Chestnut Hill, Massachusetts 02467

Management Science, 2024, vol. 70, issue 9, 6374-6394

Abstract: We examine the commonalities in international equity risk premiums by linking empirical evidence for the ability of U.S. downside and upside variance risk premiums (DVP and UVP, respectively) to predict international stock returns with implications from an empirical model featuring asymmetric economic uncertainty and risk aversion. We find that DVP and UVP predict international stock returns through U.S. bad and good macroeconomic uncertainties, respectively. Sixty percent to 80% of the dynamics of the global equity risk premium for horizons under seven months are driven by economic uncertainty, whereas risk aversion appears more relevant for longer horizons. The predictability patterns of DVP and UVP vary across countries depending on those countries’ financial and economic exposure to global shocks. In those with higher economic exposure, investors demand higher compensation for bad macroeconomic uncertainty but lower compensation for good macroeconomic uncertainty, whereas the compensation for bad macroeconomic uncertainty is lower for countries with high financial exposure.

Keywords: variance risk premium; international stock return predictability; asymmetric state variables; cross-country variation in predictability (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2023.4958 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:9:p:6374-6394

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().