Macroeconomic Determinants of Stock Market Returns, Volatility and Volatility Risk-Premia

Valentina Corradi, Antonio Mele and Walter Distaso

FMG Discussion Papers from Financial Markets Group

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 .uctuations 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 payo¤s indexed to nonparametric measures of realized volatility. We .nd that volatility risk-premia are strongly countercyclical, even more so than standard measures of return volatility.

Date: 2008-06
New Economics Papers: this item is included in nep-mac and nep-upt
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Working Paper: Macroeconomic determinants of stock market returns, volatility and volatility risk-premia (2008)
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