The Correlation Risk Premium: International Evidence

Robert Kosowski, Gonçalo Faria and Tianyu Wang

No 16389, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: In this paper we carry out the first cross-country analysis of the correlation risk premium. We examine the statistical properties of the implied and realized correlation in European equity markets and relate the resulting premium to US equity market correlation risk and a global correlation risk premium. We find evidence of strong co-movement of correlation risk premiums in European and US equity markets. Our results support the existence of a strong empirical relationship between the global correlation risk premium and international equity market option returns. We document the dependence of the correlation risk premium on macroeconomic policy uncertainty and related variables.

Keywords: Correlation risk premium; Implied correlation; Realized correlation; Variance risk premium; International equity options (search for similar items in EconPapers)
JEL-codes: G10 G12 G13 (search for similar items in EconPapers)
Date: 2021-07
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