DP16389 The Correlation Risk Premium: International Evidence

Author(s): Gonçalo Faria, Robert Kosowski, Tianyu Wang
Publication Date: July 2021
Keyword(s): correlation risk premium, implied correlation, international equity options, realized correlation, variance risk premium
JEL(s): G10, G12, G13
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16389

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 related variables.