Abstract
This study explores the relationship between realized variance jump risk and conditional equity risk premium. Using high frequency records of the Standard & Poor’s 500 index, we construct a realized variance measure and estimate its jump component using a Heterogeneous Autoregressive model augmented by a jump component. We find strong evidence that the realized variance jump risk measure significantly relates to excess stock market returns in-sample and out-of-sample from 1998 to 2010. Further, the predictive power of the variance jump remains both statistically and economically significant after controlling for commonly-used return predictors, and is also independent from variance risk premium and price jump risk. Calibration-based evidence is also consistent with our empirical findings.
Original language | English |
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Pages (from-to) | 295-317 |
Number of pages | 23 |
Journal | Australian Journal of Management |
Volume | 40 |
Issue number | 2 |
DOIs | |
Publication status | Published - 4 May 2015 |
Externally published | Yes |
Keywords
- Conditional equity premia
- HAR-J model
- realized variance jump
- stock return prediction