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Macroeconomic determinants of stock market returns, volatility and volatility risk-premia

Corradi, Valentina, Distaso, Walter and Mele, Antonio (2008) Macroeconomic determinants of stock market returns, volatility and volatility risk-premia. Discussion paper, 616. Financial Markets Group, London School of Economics and Political Science, London, UK.

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Abstract

This paper introduces a no-arbitrage framework to assess how macroeconomic factors help explain the risk-premium agents require to bear the risk of fluctuations in stock market volatil- ity. We develop a model in which return volatility and volatility risk-premia are stochastic and derive no-arbitrage conditions linking volatility to macroeconomic factors. We estimate the model using data related to variance swaps, which are contracts with payo¤s indexed to nonparametric measures of realized volatility. We nd that volatility risk-premia are strongly countercyclical, even more so than standard measures of return volatility.

Item Type: Monograph (Discussion Paper)
Official URL: http://fmg.lse.ac.uk
Additional Information: © 2008 The Authors
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Collections > LSE Financial Markets Group (FMG) Working Papers
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 616
Date Deposited: 10 Jul 2009 14:55
URL: http://eprints.lse.ac.uk/24436/

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