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Macroeconomic Determinants of Stock Market Returns, Volatility and Volatility Risk-Premia

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  • Valentina Corradi
  • Antonio Mele

    ()

  • Walter Distaso

Abstract

This paper introduces a no-arbitrage framework to assess how macroeconomic factors help explain the risk-premium agents require to bear the risk of .uctuations in stock market volatility. We develop a model in which return volatility and volatility risk-premia are stochastic and derive no-arbitrage conditions linking volatility to macroeconomic factors. We estimate the model using data related to variance swaps, which are contracts with payo¤s indexed to nonparametric measures of realized volatility. We .nd that volatility risk-premia are strongly countercyclical, even more so than standard measures of return volatility.

Suggested Citation

  • Valentina Corradi & Antonio Mele & Walter Distaso, 2008. "Macroeconomic Determinants of Stock Market Returns, Volatility and Volatility Risk-Premia," FMG Discussion Papers dp616, Financial Markets Group.
  • Handle: RePEc:fmg:fmgdps:dp616
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    File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmgdps/dp616.pdf
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    References listed on IDEAS

    as
    1. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
    2. George J. Jiang & Yisong S. Tian, 2005. "The Model-Free Implied Volatility and Its Information Content," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1305-1342.
    3. Gregory R. Duffee, 2002. "Term Premia and Interest Rate Forecasts in Affine Models," Journal of Finance, American Finance Association, vol. 57(1), pages 405-443, February.
    4. Ravi Bansal & Amir Yaron, 2004. "Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles," Journal of Finance, American Finance Association, vol. 59(4), pages 1481-1509, August.
    5. Mele, Antonio, 2007. "Asymmetric stock market volatility and the cyclical behavior of expected returns," Journal of Financial Economics, Elsevier, vol. 86(2), pages 446-478, November.
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    Cited by:

    1. Christian Conrad & Karin Loch, 2015. "Anticipating Long‐Term Stock Market Volatility," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 30(7), pages 1090-1114, November.
    2. Arisoy, Yakup Eser, 2010. "Volatility risk and the value premium: Evidence from the French stock market," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 975-983, May.

    More about this item

    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics

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