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Downside Variance Risk Premium

Bruno Feunou, Mohammad Jahan-Parvar and Cédric Okou

Staff Working Papers from Bank of Canada

Abstract: We decompose the variance risk premium into upside and downside variance risk premia. These components reflect market compensation for changes in good and bad uncertainties. Their difference is a measure of the skewness risk premium (SRP), which captures asymmetric views on favorable versus undesirable risks. Empirically, we establish that the downside variance risk premium (DVRP) is the main component of the variance risk premium. We find a positive and significant link between the DVRP and the equity premium, and a negative and significant relation between the SRP and the equity premium. A simple equilibrium consumption-based asset pricing model supports our decomposition.

Keywords: Asset; pricing (search for similar items in EconPapers)
JEL-codes: G G1 G12 (search for similar items in EconPapers)
Pages: 72 pages
Date: 2015
New Economics Papers: this item is included in nep-fmk, nep-rmg and nep-upt
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Journal Article: Downside Variance Risk Premium (2018) Downloads
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