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Variance risk premium and equity returns

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  • Fassas, Athanasios P.
  • Papadamou, Stephanos

Abstract

This study contributes to the age-old question of whether stock market returns are predictable by investigating the relationship of variance risk premium and equity returns. The volatilities derived from options prices typically exceed the corresponding subsequent realized volatilities of the underlying asset, suggesting that investors require additional compensation for bearing volatility risk. Therefore, an implied volatility index reflects not only the expected stock market uncertainty, but also investors’ risk aversion. This risk aversion element is part of investors’ compensation for bearing equity risk and can be measured by the variance risk premium.

Suggested Citation

  • Fassas, Athanasios P. & Papadamou, Stephanos, 2018. "Variance risk premium and equity returns," Research in International Business and Finance, Elsevier, vol. 46(C), pages 462-470.
    • Handle: RePEc:eee:riibaf:v:46:y:2018:i:c:p:462-470
    DOI: 10.1016/j.ribaf.2018.06.003
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    Cited by:

    1. Fassas, Athanasios P. & Siriopoulos, Costas, 2021. "Implied volatility indices – A review," The Quarterly Review of Economics and Finance, Elsevier, vol. 79(C), pages 303-329.
    2. El Ouadghiri, Imane & Guesmi, Khaled & Peillex, Jonathan & Ziegler, Andreas, 2021. "Public Attention to Environmental Issues and Stock Market Returns," Ecological Economics, Elsevier, vol. 180(C).
    3. Sakshi Saini & Sanjay Sehgal & Florent Deisting, 2020. "Monetary Policy, Risk Aversion and Uncertainty in an International Context," Multinational Finance Journal, Multinational Finance Journal, vol. 24(3-4), pages 211-266, September.
    4. Athanasios P. Fassas & Nikolas Hourvouliades, 2019. "VIX Futures as a Market Timing Indicator," JRFM, MDPI, vol. 12(3), pages 1-9, July.
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    6. DeLisle, R. Jared & Diavatopoulos, Dean & Fodor, Andy & Kassa, Haimanot, 2022. "Variation in option implied volatility spread and future stock returns," The Quarterly Review of Economics and Finance, Elsevier, vol. 83(C), pages 152-160.

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    More about this item

    Keywords

    Variance risk premium; Risk aversion; Stock market returns predictability;
    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

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