The Volatility Risk Premium Everywhere

We study the volatility risk premium, where the implied volatility exceeds the realized volatility, in multiple asset classes and countries simultaneously. Extracting the volatility risk premium by means of shorting delta hedged straddles produces economically significant average returns in bonds, credits, commodities, currencies and equity indices. Combining the asset class portfolios in a diversified global volatility risk premium factor results in a Sharpe ratio of 1.45. By studying the returns in the cross section we gain deeper insights about the consistency, commonality and patterns in the characteristics and risks of the volatility risk premium compared to individual asset studies. The volatility risk premium is not explained by common explanations offered in literature, downside risk, volatility risk or factor exposures only partially explain the excess returns. We do find a strong common risk component that the asset class portfolios tend to suffer drawdowns during recessions when volatility rises across all asset classes. We explore the robustness of the strategy and find that the premium can be further enhanced by considering alternative hedging and weighting schemes.