Stock Market Returns and the Variance Risk Premium
SUMMARY
INTRODUCTION
The US stock market in 1999 and 2020 had probably more similarities than differences. In both years the market was up considerably, retail investors were highly active, and technology companies were the most sought-after stocks. Euphoria was high and valuations seemed rather trivial for the stocks featuring attractive growth prospects.
A more nuanced similarity was that the market volatility was above average in both periods, which can be considered rather unusual. The VIX ended at 23% in 2020, which is greater than the long-term average of approximately 19%. Typically rising stock markets are associated with declining volatility.