Abstract
We study equity (EVRP) and Treasury variance risk premia (TVRP) jointly and document a number of findings: First, relative to their volatility, TVRP are comparable in magnitude to EVRP. Second, while there is mild positive co-movement between EVRP and TVRP unconditionally, time series estimates of correlation display distinct spikes in both directions and have been notably volatile since the financial crisis. Third $(i)$ short maturity TVRP predict excess returns on short maturity bonds; $(ii)$ long maturity TVRP and EVRP predict excess returns on long maturity bonds; and $(iii)$ while EVRP predict equity returns for horizons up to 6-months, long maturity TVRP contain robust information for long run equity returns. Finally, exploiting the dynamics of real and nominal Treasuries we document that short maturity break-even rates are a power determinant of the joint dynamics of EVRP, TVRP and their co-movement. We argue this result is consistent with an economy in which derivative markets embed fears about deflation.
Original language | English |
---|---|
Publication date | 2017 |
Number of pages | 42 |
Publication status | Published - 2017 |
Event | 2017 Annual Meeting of the Society for Economic Dynamics - Edinburgh, United Kingdom Duration: 22 Jun 2017 → 24 Jun 2017 https://www.economicdynamics.org/sedam_2017/ |
Conference
Conference | 2017 Annual Meeting of the Society for Economic Dynamics |
---|---|
Country/Territory | United Kingdom |
City | Edinburgh |
Period | 22/06/2017 → 24/06/2017 |
Internet address |
Keywords
- Variance risk premia
- Implied volatility
- Realized volatility
- Covariation
- Stocks
- Bonds