Variance Risk Premiums in Emerging Markets: Global Integration and Economic Uncertainty
83 Pages Posted: 25 Jun 2018 Last revised: 9 May 2019
Date Written: May 2019
We construct variance risk premiums for the nine major emerging markets of Brazil, China, India, South Korea, Mexico, Poland, Russia, South Africa, and Taiwan from 2000 to 2017 using the sample-extension methodology in Lynch and Wachter (2013). Both the emerging market and developed market variance risk premiums can predict stock market returns. However, the former is more important for longer horizons (beyond four months), whereas the latter is more important for shorter horizons (within four months). The partial integration of emerging markets and global economic uncertainty exposure may explain these different predictability patterns.
Keywords: Variance risk premium, emerging markets, stock return predictability, market integration, economic uncertainty
JEL Classification: G12, G13, G15
Suggested Citation: Suggested Citation