Abstract
The risk premium of stocks due to priced variance risk is summarized to two variables -- the stock-specific price of variance risk (the difference between realized and option-implied variance) and the quantity (i.e., how stock prices respond to their variance shocks) of variance risk. Empirically, stocks with a high negative price have higher future returns. However, this spread is significant only for stocks that also have a high negative quantity. The relationship holds after controlling for market variance risk and also for stocks without options traded, suggesting that the results are unlikely to be driven by the price pressure of informed trading.
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