IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v58y2023ipds1544612323010504.html
   My bibliography  Save this article

The international integration of the term structure of expected market risk premia

Author

Listed:
  • Rubio, Gonzalo
  • Serrano, Pedro
  • Vaello-Sebastià, Antoni

Abstract

Using option prices to extract expected market risk premia (ERP) across international stock markets, we show that the term structure of the ERP is slightly downward sloping, but its slope becomes steeply downward sloping during bad economic times. Indeed, formal tests show that shocks to international expected equity excess returns are highly integrated, especially during recessions. Moreover, as additional evidence of international integration, these expectation shocks impact in a similar way the realized returns of popular risk factors across stock markets. The exposures of risk factors to changes in ERP across international markets are highly integrated.

Suggested Citation

  • Rubio, Gonzalo & Serrano, Pedro & Vaello-Sebastià, Antoni, 2023. "The international integration of the term structure of expected market risk premia," Finance Research Letters, Elsevier, vol. 58(PD).
  • Handle: RePEc:eee:finlet:v:58:y:2023:i:pd:s1544612323010504
    DOI: 10.1016/j.frl.2023.104678
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544612323010504
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.frl.2023.104678?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Fabian Hollstein & Marcel Prokopczuk & Christoph Würsig, 2020. "Volatility term structures in commodity markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(4), pages 527-555, April.
    2. Ian Martin, 2017. "What is the Expected Return on the Market?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(1), pages 367-433.
    3. Ian W. R. Martin & Christian Wagner, 2019. "What Is the Expected Return on a Stock?," Journal of Finance, American Finance Association, vol. 74(4), pages 1887-1929, August.
    4. Fabian Hollstein & Marcel Prokopczuk & Chardin Wese Simen, 2019. "The term structure of systematic and idiosyncratic risk," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(4), pages 435-460, April.
    5. Bruno Feunou & Jean-Sébastien Fontaine & Abderrahim Taamouti & Roméo Tédongap, 2014. "Risk Premium, Variance Premium, and the Maturity Structure of Uncertainty," Review of Finance, European Finance Association, vol. 18(1), pages 219-269.
    6. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    7. John H. Cochrane, 2011. "Presidential Address: Discount Rates," Journal of Finance, American Finance Association, vol. 66(4), pages 1047-1108, August.
    8. John Y. Campbell & Stefano Giglio & Christopher Polk, 2023. "What Drives Booms and Busts in Value?," NBER Working Papers 31859, National Bureau of Economic Research, Inc.
    9. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    10. repec:bla:jfinan:v:59:y:2004:i:3:p:1345-1365 is not listed on IDEAS
    11. Johnson, Travis L., 2017. "Risk Premia and the VIX Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(6), pages 2461-2490, December.
    12. Chabi-Yo, Fousseni & Loudis, Johnathan, 2020. "The conditional expected market return," Journal of Financial Economics, Elsevier, vol. 137(3), pages 752-786.
    13. Back, Kerry & Crotty, Kevin & Kazempour, Seyed Mohammad, 2022. "Validity, tightness, and forecasting power of risk premium bounds," Journal of Financial Economics, Elsevier, vol. 144(3), pages 732-760.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fousseni Chabi-Yo & Chukwuma Dim & Grigory Vilkov, 2023. "Generalized Bounds on the Conditional Expected Excess Return on Individual Stocks," Management Science, INFORMS, vol. 69(2), pages 922-939, February.
    2. Ian W. R. Martin & Christian Wagner, 2019. "What Is the Expected Return on a Stock?," Journal of Finance, American Finance Association, vol. 74(4), pages 1887-1929, August.
    3. Pagano, Marco & Wagner, Christian & Zechner, Josef, 2023. "Disaster resilience and asset prices," Journal of Financial Economics, Elsevier, vol. 150(2).
    4. Michael Hasler & Charles Martineau, 2023. "Explaining the Failure of the Unconditional CAPM with the Conditional CAPM," Management Science, INFORMS, vol. 69(3), pages 1835-1855, March.
    5. Nieto, Belén & Rubio, Gonzalo, 2022. "The risk aversion and uncertainty channels between finance and macroeconomics," Finance Research Letters, Elsevier, vol. 45(C).
    6. Shi, Huai-Long & Zhou, Wei-Xing, 2022. "Factor volatility spillover and its implications on factor premia," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 80(C).
    7. Muhammad Kashif & Thomas Leirvik, 2022. "The MAX Effect in an Oil Exporting Country: The Case of Norway," JRFM, MDPI, vol. 15(4), pages 1-16, March.
    8. Maysam Khodayari Gharanchaei & Prabhu Prasad Panda & Xilin Chen, 2024. "Quantitative Investment Diversification Strategies via Various Risk Models," Papers 2407.01550, arXiv.org.
    9. Ng, Joe Cho Yiu & Leung, Charles Ka Yui & Chan, Suikang, 2022. "Corporate Real Estate Holding and Stock Returns: International Evidence from Listed Companies," MPRA Paper 111691, University Library of Munich, Germany.
    10. de Oliveira Souza, Thiago, 2019. "A critique of momentum anomalies," Discussion Papers on Economics 5/2019, University of Southern Denmark, Department of Economics.
    11. Shaun Bond & Chen Xue, 2017. "The Cross Section of Expected Real Estate Returns: Insights from Investment-Based Asset Pricing," The Journal of Real Estate Finance and Economics, Springer, vol. 54(3), pages 403-428, April.
    12. Obaid, Khaled & Pukthuanthong, Kuntara, 2022. "A picture is worth a thousand words: Measuring investor sentiment by combining machine learning and photos from news," Journal of Financial Economics, Elsevier, vol. 144(1), pages 273-297.
    13. Elyasiani, Elyas & Gambarelli, Luca & Muzzioli, Silvia, 2020. "Moment risk premia and the cross-section of stock returns in the European stock market," Journal of Banking & Finance, Elsevier, vol. 111(C).
    14. Paul Handro & Bogdan Dima, 2024. "Analyzing Financial Markets Efficiency: Insights from a Bibliometric and Content Review," Journal of Financial Studies, Institute of Financial Studies, vol. 16(9), pages 119-175, May.
    15. Back, Kerry & Crotty, Kevin & Kazempour, Seyed Mohammad, 2022. "Validity, tightness, and forecasting power of risk premium bounds," Journal of Financial Economics, Elsevier, vol. 144(3), pages 732-760.
    16. Esfandiar Maasoumi & Jianqiu Wang & Zhuo Wang & Ke Wu, 2024. "Identifying factors via automatic debiased machine learning," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 39(3), pages 438-461, April.
    17. Lioui, Abraham & Tarelli, Andrea, 2022. "Chasing the ESG factor," Journal of Banking & Finance, Elsevier, vol. 139(C).
    18. Jean‐Philippe Bouchaud & Philipp Krüger & Augustin Landier & David Thesmar, 2019. "Sticky Expectations and the Profitability Anomaly," Journal of Finance, American Finance Association, vol. 74(2), pages 639-674, April.
    19. Agarwal, Vikas & Green, T. Clifton & Ren, Honglin, 2018. "Alpha or beta in the eye of the beholder: What drives hedge fund flows?," Journal of Financial Economics, Elsevier, vol. 127(3), pages 417-434.
    20. Hanauer, Matthias X. & Jansen, Maarten & Swinkels, Laurens & Zhou, Weili, 2024. "Factor models for Chinese A-shares," International Review of Financial Analysis, Elsevier, vol. 91(C).

    More about this item

    Keywords

    Term structure of expected risk premia; Risk-neutral variance; Option prices; International integration; Risk factor sensitivities;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:58:y:2023:i:pd:s1544612323010504. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.