IDEAS home Printed from https://ideas.repec.org/a/oup/jfinec/v16y2018i3p341-383..html

Downside Variance Risk Premium

Author

Listed:
  • Bruno Feunou
  • Mohammad R Jahan-Parvar
  • Cédric Okou

Abstract

We propose a new decomposition of the variance risk premium (VRP) in terms of upside and downside VRPs. These components reflect market compensation for changes in good and bad uncertainties. Empirically, we establish that the downside VRP is the main component of the VRP. We find a positive and significant link between the downside VRP and the equity premium, and a negative but statistically insignificant link between the upside VRP and the equity premium. The opposite relationships between these two components and the equity premium explains the stronger link found between the downside VRP and the equity premium compared with the well-established relationship between VRP and the equity premium. A simple equilibrium consumption-based asset pricing model, fitted to the U.S. data, supports our decomposition.

Suggested Citation

  • Bruno Feunou & Mohammad R Jahan-Parvar & Cédric Okou, 2018. "Downside Variance Risk Premium," Journal of Financial Econometrics, Oxford University Press, vol. 16(3), pages 341-383.
    • Handle: RePEc:oup:jfinec:v:16:y:2018:i:3:p:341-383.
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/jjfinec/nbx020
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or

    for a different version of it.

    Other versions of this item:

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:jfinec:v:16:y:2018:i:3:p:341-383.. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://edirc.repec.org/data/sofieea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.