The role of variance risk premium in predicting excess stock market return: out-of-sample evidences

This paper examines the out-of-sample performance of variance risk premium in predicting excess stock market returns across nine international markets. We assess the out-of-sample predictability through statistical and economic significance tests and find that the variance risk premium has strong forecasting power at the 4-month horizon for most of the international markets considered in this study. In addition, we find the predictability is even stronger during the recent financial crisis period.