The Variance Risk Premium in Equilibrium Models

Abstract The equity variance risk premium is the expected compensation earned for selling in markets. positive and shows only moderate persistence. High premiums coincide with left tail of consumption growth distribution shifting down. These facts, together risk-neutral skewness being substantially more negative than physical return skewness, refute bulk extant consumption-based asset pricing models. We introduce a tractable habit model that does fit data. In model, depends positively (or negatively) on “bad” “good”) uncertainty.