The correlation risk premium: international evidence

Gonçalo Faria; Robert Kosowski; Tianyu Wang

doi:10.1016/j.jbankfin.2021.106399

The correlation risk premium: international evidence

Gonçalo Faria, Robert Kosowski, Tianyu Wang

Research output: Contribution to journal › Article › peer-review

2 Citations (Scopus)

Abstract

In this paper we carry out a 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 uncertainty and related variables.

Original language	English
Article number	106399
Number of pages	14
Journal	Journal of Banking and Finance
Volume	136
DOIs	https://doi.org/10.1016/j.jbankfin.2021.106399
Publication status	Published - Mar 2022

Keywords

Correlation risk premium
Implied correlation
International equity options
Realized correlation
Variance risk premium

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10.1016/j.jbankfin.2021.106399

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title = "The correlation risk premium: international evidence",

abstract = "In this paper we carry out a 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 uncertainty and related variables.",

keywords = "Correlation risk premium, Implied correlation, International equity options, Realized correlation, Variance risk premium",

author = "Gon{\c c}alo Faria and Robert Kosowski and Tianyu Wang",

note = "Funding Information: We would like to thank Adrian Buss, Dong Lou, Tarun Ramadorai, and participants at the 2016 IFSID Conference on Derivatives, at the 2018 IFABS Conference, at the 2018 University of Vigo workshop and at the Cat{\'o}lica Porto Business School seminar for useful comments. We gratefully acknowledge financial support from CDI (previously IFSID) and the Global Risk Institute. Faria gratefully acknowledges financial support from the Funda{\c c}{\~a}o para a Ci{\^e}ncia e Tecnologia through project UIDB/00731/2020. The usual disclaimer applies. Publisher Copyright: {\textcopyright} 2022 Elsevier B.V.",

year = "2022",

month = mar,

doi = "10.1016/j.jbankfin.2021.106399",

language = "English",

volume = "136",

journal = "Journal of Banking and Finance",

issn = "0378-4266",

publisher = "Elsevier",

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TY - JOUR

T1 - The correlation risk premium

T2 - international evidence

AU - Faria, Gonçalo

AU - Kosowski, Robert

AU - Wang, Tianyu

N1 - Funding Information: We would like to thank Adrian Buss, Dong Lou, Tarun Ramadorai, and participants at the 2016 IFSID Conference on Derivatives, at the 2018 IFABS Conference, at the 2018 University of Vigo workshop and at the Católica Porto Business School seminar for useful comments. We gratefully acknowledge financial support from CDI (previously IFSID) and the Global Risk Institute. Faria gratefully acknowledges financial support from the Fundação para a Ciência e Tecnologia through project UIDB/00731/2020. The usual disclaimer applies. Publisher Copyright: © 2022 Elsevier B.V.

PY - 2022/3

Y1 - 2022/3

N2 - In this paper we carry out a 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 uncertainty and related variables.

AB - In this paper we carry out a 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 uncertainty and related variables.

KW - Correlation risk premium

KW - Implied correlation

KW - International equity options

KW - Realized correlation

KW - Variance risk premium

UR - http://www.scopus.com/inward/record.url?scp=85124260782&partnerID=8YFLogxK

U2 - 10.1016/j.jbankfin.2021.106399

DO - 10.1016/j.jbankfin.2021.106399

M3 - Article

SN - 0378-4266

VL - 136

JO - Journal of Banking and Finance

JF - Journal of Banking and Finance

M1 - 106399

ER -

The correlation risk premium: international evidence

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CEGE: Research Center in Management and Economics

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The correlation risk premium: international evidence

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CEGE: Research Center in Management and Economics

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