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Stock Return Predictability and Variance Risk Premia: Statistical Inference and International Evidence

Published online by Cambridge University Press:  05 August 2014

Tim Bollerslev ,
James Marrone ,
Lai Xu  and
Hao Zhou
Tim Bollerslev
Affiliation:
boller@duke.edu, Department of Economics, Duke University, Box 90097, Durham, NC 27708, and NBER and CREATES
James Marrone
Affiliation:
jmar@uchicago.edu, Department of Economics, University of Chicago, 1126 E 59th St, Chicago, IL 60637
Lai Xu
Affiliation:
lxu100@syr.edu, Whitman School of Management, Syracuse University, 721 University Ave, Syracuse, NY 13244
Hao Zhou
Affiliation:
zhouh@pbcsf.tsinghua.edu.cn, PBC School of Finance, Tsinghua University, 43 Chengfu Rd, Haidian District, Beijing, 100083, P. R. China.
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Abstract

Recent empirical evidence suggests that the variance risk premium predicts aggregate stock market returns. We demonstrate that statistical finite sample biases cannot “explain” this apparent predictability. Further corroborating the existing evidence of the United States, we show that country-specific regressions for France, Germany, Japan, Switzerland, the Netherlands, Belgium, and the United Kingdom result in quite similar patterns. Defining a “global” variance risk premium, we uncover even stronger predictability and almost identical cross-country patterns through the use of panel regressions.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 49 , Issue 3 , June 2014 , pp. 633 - 661
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2014 

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