Variance Risk Premiums in Emerging Markets

Abstract

We provide first time the emerging market variance risk premiums (EMVRP) from 2006 to 2019, based on nine emerging stocks and options markets---Brazil, China, India, South Korea, Mexico, Poland, Russia, South Africa, and Taiwan. The EMVRP significantly predicts international stock returns and currency appreciation rates, especially for horizons longer than five months. This is in sharp contrast with the predictive pattern of the developed market variance risk premium (DMVRP), which is more important over horizons shorter than five months. These findings are consistent with an illustrative model incorporating partial market integration and heterogeneous economic uncertainty.

Keywords: Variance risk premium, emerging markets, stock return predictability, currency return predictability, market integration, economic uncertainty

JEL Classification: G12, G13, G15