Conditional equity risk premia and realized variance jump risk

Zhanglong Wang, Kent Wang and Zheyao Pan ()

Australian Journal of Management, 2015, vol. 40, issue 2, 295-317

Abstract: This study explores the relationship between realized variance jump risk and conditional equity risk premium. Using high frequency records of the Standard & Poor’s 500 index, we construct a realized variance measure and estimate its jump component using a Heterogeneous Autoregressive model augmented by a jump component. We find strong evidence that the realized variance jump risk measure significantly relates to excess stock market returns in-sample and out-of-sample from 1998 to 2010. Further, the predictive power of the variance jump remains both statistically and economically significant after controlling for commonly-used return predictors, and is also independent from variance risk premium and price jump risk. Calibration-based evidence is also consistent with our empirical findings.

Keywords: Conditional equity premia; HAR-J model; realized variance jump; stock return prediction (search for similar items in EconPapers)
JEL-codes: C14 C53 G12 G17 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:40:y:2015:i:2:p:295-317

DOI: 10.1177/0312896214526602

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