This project studies how variance shocks affect asset prices. Variance risk affects investors’ portfolio decisions. Positive variance shock means smaller investment opportunities for investors. As a result, investors consider the possibility of variance shocks when making their portfolio decisions. This information – the possibility of a variance shock and how asset prices react to changes in the shock –is critical for investors after major finance events similar to the Global Financial Crisis. In this project, I propose a new out-of-sample prediction methodology of market returns using the variance risk premium and explore several asset pricing implications for individual stock returns.