Characterizing the Variance Risk Premium: The Role of the Leverage Effect. (16th November 2021)

• Record Type: Journal Article
• Authors: Hu, Guanglian; Jacobs, Kris; Seo, Sang Byung
• Editors: Chen, Hui
• Is Part Of: Review of asset pricing studies. Volume 12:Number 2(2022)
• Page Start: 500
• Page End: 542
• Publication Date: 2021-11-16
• Subjects: Capital assets pricing model -- Periodicals; Stocks -- Prices -- Periodicals; Investments -- Valuation -- Periodicals; Finance -- Periodicals; 332.632042
• DOI: 10.1093/rapstu/raab027
• Languages: English
• ISSNs: 2045-9939

Abstract

Abstract: The conditional covariance between the market return and its variance, which we refer to as the leverage effect, is positively related to the variance risk premium. It contains incremental information about the variance risk premium after controlling for other return moments and additional variables suggested by the literature as determinants of the variance risk premium. This empirical finding is supported by theory: the pricing of volatility risk is the economic channel behind the strong positive relation between the two variables. We use this relation to construct a time series of the variance risk premium dating back to 1926. ( JEL G12, G13) Received February 7, 2020; editorial decision September 01, 2021.