The variance risk premium and fundamental uncertainty

•We suggest a new measure for the expected variance risk premium (VRP).•The new VRP is based on a conditional variance forecast from a GARCH-MIDAS model.•The long-term volatility component reflects the state of the macroeconomy.•Our VRP has stronger predictive power for stock returns than conventional measures.•Long-term volatility component captures the fundamental uncertainty driving the VRP.

We propose a new measure of the expected variance risk premium that is based on a forecast of the conditional variance from a GARCH-MIDAS model. We find that the new measure has strong predictive ability for future US aggregate stock market returns and rationalize this result by showing that the new measure effectively isolates fundamental uncertainty as the factor that drives the variance risk premium.