A0991
Title: Predictability of excess bond premium and variance risk premium for business cycles and recession risk
Authors: Toshiaki Watanabe - Hitotsubashi University (Japan) [presenting]
Masato Ubukata - Kushiro Public University of Economics (Japan)
Yoichi Ueno - Bank of Japan (Japan)
Abstract: Variance risk premium (VRP) is the difference between the conditional variance of stock returns under the risk-neutral measure and that under the physical measure. Empirical evidence suggests that the VRPs of stock indexes may predict some financial and macroeconomic variables such as the excess returns of stock indexes, credit spreads and business cycles. Excess bond premium (EBP) is a component of credit spreads that is not attributable to expected default risk. It has also attracted the attention as a predictor for business cycles and recession risk. Using the Japans data, the predictive power of VRP for business cycles and recession risk is compared with that of EBP. The Japanese volatility index (VXJ) published by Osaka University is used as the conditional variance of Nikkei 225 stock index under the risk-neutral measure. The conditional variance of Nikkei 225 under the physical measure is calculated using the extended heterogeneous autoregressive (HAR) model with the realized volatility of Nikkei 225. EBP is calculated using the credit spreads of corporate bonds in Japan.
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