Working Paper: CEPR ID: DP16389
Authors: Gonalo Faria; Robert Kosowski; Tianyu Wang
Abstract: In this paper we carry out the first cross-country analysis of the correlation risk premium. We examine the statistical properties of the implied and realized correlation in European equity markets and relate the resulting premium to US equity market correlation risk and a global correlation risk premium. We find evidence of strong co-movement of correlation risk premiums in European and US equity markets.Our results support the existence of a strong empirical relationship between the global correlation risk premium and international equity market option returns. We document the dependence of the correlation risk premium on macroeconomic policy uncertainty and relatedvariables.
Keywords: correlation risk premium; implied correlation; realized correlation; variance risk premium; international equity options
JEL Codes: G10; G12; G13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| macroeconomic policy uncertainty (E60) | correlation risk premium (C10) |
| higher levels of policy uncertainty (D89) | increased correlation risk premium (C10) |
| correlation risk premium (C10) | equity index option returns (G12) |
| global correlation risk premium (C10) | cross-sectional variation in equity index option returns (C46) |