Time-Varying Variance Risk Premium and the Predictability of Chinese Stock Market Return

Jian Chen, Chen He and Jing Zhang

Emerging Markets Finance and Trade, 2017, vol. 53, issue 8, 1734-1748

Abstract: A number of studies have shown that the variance risk premium (VRP), defined as the difference between risk-neutral and physical expected variances, has strong predictive power for the excess stock market return, and this predictability peaks at 3- to 6-month prediction horizons. However, little research presents empirical evidences for Chinese stock market due to the absence of option market. Under general equilibrium asset pricing framework, this article estimates time-varying VRP using the Chinese stock market data. We find that the estimated VRP predicts the excess Chinese stock market return, and this forecasting power is stronger at 4- and 5-month horizons, which is consistent with the findings of existing literature.

Date: 2017
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DOI: 10.1080/1540496X.2016.1186010

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