Macroeconomic determinants of stock market returns, volatility and volatility risk-premia

This paper introduces a no-arbitrage framework to assess how macroeconomic factors help explain the risk-premium agents require to bear the risk of fluctuations in stock market volatility. We develop a model in which return volatility and volatility risk-premia are stochastic and derive no-arbitrage conditions linking volatility to macroeconomic factors. We estimate the model using data related to variance swaps, which are contracts with payoÞs indexed to nonparametric measures of realized volatility. We find that volatility risk-premia are strongly countercyclical, even more so than standard measures of return volatility.