Want to Predict Future Stock Market Returns? Measuring The Downside, or the Market’s Desire to Reduce Risk, Could Be Key, A Guest Post from researchers at Bank of Canada, Board of Governors of the Federal Reserve System, and University of Quebec at Montreal
Current asset pricing research accepts that equity market returns are largely predictable over long horizons. But what about predicting short term returns?
For years, many in the industry have looked to Variance Risk Premium (VRP) as one measure to provide superior forecasts for stock market returns over shorter time periods of less than a year. Variance risk premium is the difference between the market variance implied by option prices, and the actual variance realized over time....
