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Variance Risk Premia, Asset Predictability Puzzles, and Macroeconomic Uncertainty

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  • Hao Zhou

    (PBC School of Finance, Tsinghua University, Beijing 100083, China)

Abstract

This article reviews the predictability evidence on the variance risk premium: ( a) It predicts significant positive risk premia across equity, bond, currency, and credit markets; ( b) the predictability peaks at few-month horizons and dies out afterward; ( c) such a short-run predictability is complementary to the long-run predictability offered by the price-to-earnings ratio, forward rate, interest differential, and leverage ratio. Several structural approaches based on the notion of economic uncertainty are discussed for generating these stylized facts about the variance risk premium, which has broad implications for various empirical asset pricing puzzles.

Suggested Citation

  • Hao Zhou, 2018. "Variance Risk Premia, Asset Predictability Puzzles, and Macroeconomic Uncertainty," Annual Review of Financial Economics, Annual Reviews, vol. 10(1), pages 481-497, November.
    • Handle: RePEc:anr:refeco:v:10:y:2018:p:481-497
    DOI: 10.1146/annurev-financial-110217-022737
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    More about this item

    Keywords

    macroeconomic uncertainty; asset return predictability; variance risk premium; recursive utility function;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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