Tail Risk Premia and Return Predictability∗
نویسندگان
چکیده
The variance risk premium, defined as the difference between the actual and riskneutral expectations of the forward aggregate market variation, helps predict future market returns. Relying on new essentially model-free estimation procedure, we show that much of this predictability may be attributed to time variation in the part of the variance risk premium associated with the special compensation demanded by investors for bearing jump tail risk, consistent with idea that market fears play an important role in understanding the return predictability.
منابع مشابه
Predictability of Bond Risk Premia with an Affine Term Structure Model
PREDICTABILITY OF BOND RISK PREMIA WITH AN AFFINE TERM STRUCTURE MODEL by SIBEL KORKMAZ Adviser: Professor Liuren Wu This thesis focuses on zero-coupon bond risk premia. In chapter 1 first I summarize the literature that defines expectation hypothesis, time variation in bond risk premia, well known macroeconomic and variety of technical indicators which predict bond return forecasts. Then, I co...
متن کاملThe Predictability of Returns with Regime Shifts in Consumption and Dividend Growth
We model consumption and dividend growth as di¤erent processes across two latent regimes. We estimate the equilibrium model over 1930-2009 and show that the second regime is associated with recessions, market downturns, higher risk premia, lower consumption and dividend growth, higher volatility of returns and growth rates, and lower market-wide price-dividend ratio. The model performs better a...
متن کاملReturn Predictability in Recessions: an Asset Pricing Perspective
I show that the dividend-price ratio predicts aggregate stock market returns with higher precision during recessions than in expansions, in a way that is both statistically and economically significant. This empirical evidence cannot be reconciled with three popular asset pricing approaches: habit-persistence (Campbell and Cochrane (1999)), long-run risk (Bansal and Yaron (2004)) and rare disas...
متن کاملMarket Closure , Liquidity Premia , and Return Predictability ∗
In his seminal work, Constantinides (1986) finds that transaction cost has only a second order effect on liquidity premia. In this paper, we show that incorporating the well-established time-varying return dynamics across trading and nontrading periods can produce a first order effect that is much greater than that found by the existing literature and comparable to empirical evidence. Surprisin...
متن کاملStock Return Predictability and Variance Risk Premia: Statistical Inference and International Evidence∗
Recent empirical evidence suggests that the variance risk premium, or the difference between risk-neutral and statistical expectations of the future return variation, predicts aggregate stock market returns, with the predictability especially strong at the 2-4 month horizons. We provide extensive Monte Carlo simulation evidence that statistical finite sample biases in the overlapping return reg...
متن کامل