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The Correlation Risk Premium: International Evidence

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  • Faria, Gonçalo
  • Kosowski, Robert
  • Wang, Tianyu

Abstract

In this paper we carry out a cross-country analysis of the correlation risk premium. We examine the statistical properties of the implied and realized correlation in European equity markets and relate the resulting premium to US equity market correlation risk and a global correlation risk premium. We find evidence of strong co-movement of correlation risk premiums in European and US equity markets. Our results support the existence of a strong empirical relationship between the global correlation risk premium and international equity market option returns. We document the dependence of the correlation risk premium on macroeconomic uncertainty and related variables.

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  • Faria, Gonçalo & Kosowski, Robert & Wang, Tianyu, 2022. "The Correlation Risk Premium: International Evidence," Journal of Banking & Finance, Elsevier, vol. 136(C).
    • Handle: RePEc:eee:jbfina:v:136:y:2022:i:c:s0378426621003502
    DOI: 10.1016/j.jbankfin.2021.106399
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    Cited by:

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    2. Wolfgang Schadner & Joshua Traut, 2022. "Estimating Forward-Looking Stock Correlations from Risk Factors," Mathematics, MDPI, vol. 10(10), pages 1-19, May.
    3. Wang, Jiqian & Ma, Feng & Wang, Tianyang & Wu, Lan, 2023. "International stock volatility predictability: New evidence from uncertainties," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 85(C).

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    More about this item

    Keywords

    correlation risk premium; implied correlation; realized correlation; variance risk premium; international equity options;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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