Conditional equity risk premia and realized variance jump risk. (May 2015)

• Record Type: Journal Article
• Authors: Wang, Zhanglong; Wang, Kent; Pan, Zheyao
• Is Part Of: Australian journal of management. Volume 40:Number 2(2015:May)
• Page Start: 295
• Page End: 317
• Publication Date: 2015-05
• Subjects: Conditional equity premia -- HAR-J model -- realized variance jump -- stock return prediction; G12 -- G17 -- C14 -- C53; Management -- Periodicals; Management -- Australia -- Periodicals; Business enterprises -- Finance -- Periodicals; Industrial management -- Australia -- Periodicals; 330
• DOI: 10.1177/0312896214526602
• Languages: English
• ISSNs: 0312-8962

Abstract

This study explores the relationship between realized variance jump risk and conditional equity risk premium. Using high frequency records of the Standard & Poor's 500 index, we construct a realized variance measure and estimate its jump component using a Heterogeneous Autoregressive model augmented by a jump component. We find strong evidence that the realized variance jump risk measure significantly relates to excess stock market returns in-sample and out-of-sample from 1998 to 2010. Further, the predictive power of the variance jump remains both statistically and economically significant after controlling for commonly-used return predictors, and is also independent from variance risk premium and price jump risk. Calibration-based evidence is also consistent with our empirical findings.