Title: Risk evaluation and pricing: Risk differential and return predictability patterns across markets and countries
Authors: Francesco Violante - ENSAE ParisTech (France) [presenting]
Jeroen Rombouts - ESSEC Business School (France)
Lars Stentoft - University of Western Ontario (Canada)
Abstract: The relationship between future aggregate market returns and variance risk premia has been recently at the center of an active debate. While some studies suggests that the variance risk premium suggest the existence of a strongly positive correlation, recent contributions show that such predictability is largely attributable to the effect of extreme variance events and more precisely to the agents perception of such events. Furthermore, mostly due to data availability, empirical evidence is generally reported for the U.S. as represented by the S\& P500 portfolio. In a comprehensive empirical study, we first extend the results to different market-wide U.S. portfolios, i.e. S\& P500, DJIA30, RUSSELL2000, NASDAQ100, characterized by different asset composition, degree of diversification and dimension. Second, we uncover commonalities and idiosyncrasies in return predictability patterns at international level by considering several major European and Asian market portfolio.