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Time-Varying Variance Risk Premium and the Predictability of Chinese Stock Market Return

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  • Jian Chen
  • Chen He
  • Jing Zhang

Abstract

A number of studies have shown that the variance risk premium (VRP), defined as the difference between risk-neutral and physical expected variances, has strong predictive power for the excess stock market return, and this predictability peaks at 3- to 6-month prediction horizons. However, little research presents empirical evidences for Chinese stock market due to the absence of option market. Under general equilibrium asset pricing framework, this article estimates time-varying VRP using the Chinese stock market data. We find that the estimated VRP predicts the excess Chinese stock market return, and this forecasting power is stronger at 4- and 5-month horizons, which is consistent with the findings of existing literature.

Suggested Citation

  • Jian Chen & Chen He & Jing Zhang, 2017. "Time-Varying Variance Risk Premium and the Predictability of Chinese Stock Market Return," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 53(8), pages 1734-1748, August.
    • Handle: RePEc:mes:emfitr:v:53:y:2017:i:8:p:1734-1748
    DOI: 10.1080/1540496X.2016.1186010
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    Cited by:

    1. Petr Bora & Michal Vaněk, 2017. "Estimating the Cost of Equity Using a Mining Build-up Model," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 65(5), pages 1643-1653.

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