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Variance Risk Premium Components in Japan for Predictability: Evidence from the COVID-19 Pandemic

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  • Masato Ubukata

Abstract

The literature on asset predictability suggests the usefulness of the variance risk premium (VRP) and its diffusive and jump risk components as predictors that can yield an improved forecast power. This study investigates whether there is a robust and statistically significant relation between the VRP components and the future Japanese composite index of coincident indicators (CI) and credit spreads (CS), including the outbreak of the COVID-19 pandemic which has caused economic conditions and financial markets to become unstable. The main empirical results are as follows- (i) our rolling window predictive regressions indicate the stability of the significantly negative relation between the diffusive risk component of the VRP and the future CI; (ii) the significantly positive relation of the jump risk component of the VRP and the future lower-rated CS is hampered by the inclusion of the COVID-19 period when the Bank of Japan purchased large-scale corporate bonds under the continuing Japanese expansionary monetary policy; and (iii) the diffusive risk component is partly affected by the impact of the COVID-19 pandemic, but remains significantly positive relation with the future higher- and lower-rated CS.

Suggested Citation

  • Masato Ubukata, 2023. "Variance Risk Premium Components in Japan for Predictability: Evidence from the COVID-19 Pandemic," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 15(8), pages 1-27, August.
    • Handle: RePEc:ibn:ijefaa:v:15:y:2023:i:8:p:27
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    References listed on IDEAS

    as
    1. Andersen, Torben G. & Todorov, Viktor & Ubukata, Masato, 2021. "Tail risk and return predictability for the Japanese equity market," Journal of Econometrics, Elsevier, vol. 222(1), pages 344-363.
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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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