Macroeconomic determinants of stock market returns, volatility and volatility risk-premia

Valentina Corradi, Walter Distaso and Antonio Mele

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper introduces a no-arbitrage framework to assess how macroeconomic factors help explain the risk-premium agents require to bear the risk of fluctuations in stock market volatility. We develop a model in which return volatility and volatility risk-premia are stochastic and derive no-arbitrage conditions linking volatility to macroeconomic factors. We estimate the model using data related to variance swaps, which are contracts with payoffs indexed to nonparametric measures of realized volatility. We find that volatility risk-premia are strongly countercyclical, even more so than standard measures of return volatility.

Keywords: Realized volatility; Volatility risk-premium; Macroeconomic factors; No arbitrage restrictions; Concentrated simulated general method of moments; Block-bootstrap. (search for similar items in EconPapers)
JEL-codes: E00 G00 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2008-06-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://eprints.lse.ac.uk/24436/ Open access version. (application/pdf)

Related works:
Working Paper: Macroeconomic Determinants of Stock Market Returns, Volatility and Volatility Risk-Premia (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:24436

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