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The Variance Risk Premium and Fundamental Uncertainty

Conrad, Christian ; Loch, Karin

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Abstract

We propose a new measure of the expected variance risk premium that is based on a forecast of the conditional variance from a GARCH-MIDAS model. We find that the new measure has strong predictive ability for future U.S. aggregate stock market returns and rationalize this result by showing that the new measure effectively isolates fundamental uncertainty as the factor that drives the variance risk premium.

Item Type: Working paper
Series Name: Discussion Paper Series, University of Heidelberg, Department of Economics
Volume: 0583
Place of Publication: Heidelberg
Date Deposited: 27 Feb 2015 17:56
Date: February 2015
Number of Pages: 10
Faculties / Institutes: The Faculty of Economics and Social Studies > Alfred-Weber-Institut for Economics
Subjects: 330 Economics
Uncontrolled Keywords: Variance risk premium, return predictability, VIX, GARCH-MIDAS, economic uncertainty, vol-of-vol
Schriftenreihe ID: Discussion Paper Series / University of Heidelberg, Department of Economics
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