Department of Economics and Business Economics

Stock return predictability and variance risk premia: Statistical inference and international evidence

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  • Tim Bollerslev
  • James Marrone, Department of Economics, University of Chicago, Unknown
  • Lai Xu, Whitman School of Management, Syracuse University, United States
  • Hao Zhou, PBC School of Finance, Tsinghua University, China

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.

Original languageEnglish
JournalJournal of Financial and Quantitative Analysis
Pages (from-to)633-661
Number of pages29
Publication statusPublished - 1 Jan 2014

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