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The international integration of the term structure of expected market risk premia

Author

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  • Rubio, Gonzalo
  • Serrano, Pedro
  • Vaello-Sebastià, Antoni

Abstract

Using option prices to extract expected market risk premia (ERP) across international stock markets, we show that the term structure of the ERP is slightly downward sloping, but its slope becomes steeply downward sloping during bad economic times. Indeed, formal tests show that shocks to international expected equity excess returns are highly integrated, especially during recessions. Moreover, as additional evidence of international integration, these expectation shocks impact in a similar way the realized returns of popular risk factors across stock markets. The exposures of risk factors to changes in ERP across international markets are highly integrated.

Suggested Citation

  • Rubio, Gonzalo & Serrano, Pedro & Vaello-Sebastià, Antoni, 2023. "The international integration of the term structure of expected market risk premia," Finance Research Letters, Elsevier, vol. 58(PD).
    • Handle: RePEc:eee:finlet:v:58:y:2023:i:pd:s1544612323010504
    DOI: 10.1016/j.frl.2023.104678
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    Keywords

    Term structure of expected risk premia; Risk-neutral variance; Option prices; International integration; Risk factor sensitivities;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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