Risk Premia and Return Predictability Related to the S&P 500 Index and Individual Firms

This paper uses the stochastic volatility with contemporaneous jumps model to extract risk premium (RP) components and term structures. The sample data includes the daily returns and options of the S&P 500 and 30 large-capital firms from 1998 to 2016 including. The RP components and term structures reflect investors expectations regarding market trends. The findings reveal that in the S&P 500 index, the diffusion component of the variance RP (VRP) are the most essential factors in forecasting S&P 500 excess returns; moreover, the jump component of the VRP and its term structure explain the short-term excess returns. The firm-level findings reveal that the averages of RPs are not significantly related to future stock excess returns.