Post by Sapphire Capital on Aug 14, 2008 21:28:50 GMT 4
Expected Stock Returns and Variance Risk Premia
Tim Bollerslev
Duke University - Finance; Trinity College of Arts & Sciences - Department of Economics; National Bureau of Economic Research (NBER)
Hao Zhou
August 16, 2007
CREATES Research Paper No. 2007-17
Abstract:
We find that the difference between implied and realized variation, or the variance risk premium, is able to explain more than fifteen percent of the ex-post time series variation in quarterly excess returns on the market portfolio over the 1990 to 2005 sample period, with high (low) premia predicting high (low) future returns. The magnitude of the return predictability of the variance risk premium easily dominates that afforded by standard predictor variables like the P/E ratio, the dividend yield, the default spread, and the consumption-wealth ratio (CAY). Moreover, combining the variance risk premium with the P/E ratio results in an R2 for the quarterly returns of more than twenty-five percent. The results depend crucially on the use of "model-free", as opposed to standard Black-Scholes, implied variances, and realized variances constructed from high-frequency intraday, as opposed to daily, data. Our findings suggest that temporal variation in both risk-aversion and volatility-risk play an important role in determining stock market returns.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1150059_code357906.pdf?abstractid=1150059&mirid=1
Tim Bollerslev
Duke University - Finance; Trinity College of Arts & Sciences - Department of Economics; National Bureau of Economic Research (NBER)
Hao Zhou
August 16, 2007
CREATES Research Paper No. 2007-17
Abstract:
We find that the difference between implied and realized variation, or the variance risk premium, is able to explain more than fifteen percent of the ex-post time series variation in quarterly excess returns on the market portfolio over the 1990 to 2005 sample period, with high (low) premia predicting high (low) future returns. The magnitude of the return predictability of the variance risk premium easily dominates that afforded by standard predictor variables like the P/E ratio, the dividend yield, the default spread, and the consumption-wealth ratio (CAY). Moreover, combining the variance risk premium with the P/E ratio results in an R2 for the quarterly returns of more than twenty-five percent. The results depend crucially on the use of "model-free", as opposed to standard Black-Scholes, implied variances, and realized variances constructed from high-frequency intraday, as opposed to daily, data. Our findings suggest that temporal variation in both risk-aversion and volatility-risk play an important role in determining stock market returns.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1150059_code357906.pdf?abstractid=1150059&mirid=1