This paper oers an ambiguity-based interpretation of variance premium— the dier- ence between risk-neutral and objective expectations of market return variance— as a com- pounding eect of both belief distortion and variance dierential regarding the uncertain economic regimes. Our approach endogenously generates variance premium without impos- ing exogenous stochastic volatility or jumps in consumption process. Such a framework can reasonably match the mean variance premium as well as the mean equity premium, equity volatility, and the mean risk-free rate in the data. We …nd that about 96 percent of the mean variance premium can be attributed to ambiguity aversion. Applying the model to historical consumption data, we …nd that variance premium mostly captures depressions, deep recessions, and …nancial panics, with a post war peak in 2009.