The Variance Risk Premium and Fundamental Uncertainty

Economics Letters, Forthcoming

11 Pages Posted: 3 Mar 2015 Last revised: 15 Jul 2015

See all articles by Christian Conrad

Christian Conrad

Heidelberg University - Alfred Weber Institute for Economics; ETH Zürich - KOF Swiss Economic Institute

Karin Loch

Heidelberg University - Faculty of Economics and Social Studies

Date Written: April 1, 2015

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.

Keywords: Variance risk premium, return predictability, VIX, GARCH-MIDAS, economic uncertainty, vol-of-vol

JEL Classification: C53, C58, E32, G12, G17

Suggested Citation

Conrad, Christian and Loch, Karin, The Variance Risk Premium and Fundamental Uncertainty (April 1, 2015). Economics Letters, Forthcoming , Available at SSRN: https://ssrn.com/abstract=2572873 or http://dx.doi.org/10.2139/ssrn.2572873

Christian Conrad

Heidelberg University - Alfred Weber Institute for Economics ( email )

Grabengasse 14
Heidelberg, D-69117
Germany
+49 (06)221 543173 (Phone)

HOME PAGE: http://www.uni-heidelberg.de/conrad

ETH Zürich - KOF Swiss Economic Institute ( email )

Zurich
Switzerland

Karin Loch (Contact Author)

Heidelberg University - Faculty of Economics and Social Studies ( email )

Bergheimer Str. 58
Heidelberg, D-69115
Germany

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