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Recent Advances in Business Analytics. Selected papers of the 2021 KNOWCON-NSAIS workshop on Business Analytics

Annals of Computer Science and Information Systems, Volume 29

Volatility Risk Premium and European Equity Index Returns

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DOI: http://dx.doi.org/10.15439/2021B1

Citation: Recent Advances in Business Analytics. Selected papers of the 2021 KNOWCON-NSAIS workshop on Business Analytics, Jan Stoklasa, Pasi Luukka and Maria Ganzha (eds). ACSIS, Vol. 29, pages 19–28 ()

Full text

Abstract. For most of the time, equity index option implied volatilities exceed the corresponding realized volatilities. The resulting volatility risk premium seems to be directly linked with the equity risk premium, which motivates to study whether this investor risk aversion-related premium has explanatory power on the future stock index returns. Based on several linear regression models, this study shows that volatility risk premiums can explain a non-trivial fraction of the aggregate stock returns in Europe. Furthermore, both local and global risks are found to be systematically priced. Our findings confirm the consistency and deterministic power of volatility risk premium in the European equity markets. Additionally, the evidence supports the hypothesis that the global volatility risk and equity market premium are inter-linked

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