The VIX, the Variance Premium and Stock Market Volatility

Geert Bekaert and Marie Hoerova

No 18995, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We decompose the squared VIX index, derived from US S&P500 options prices, into the conditional variance of stock returns and the equity variance premium. The latter is increasing in risk aversion in a wide variety of economic settings. We tackle several measurement issues assessing a plethora of state-of-the-art volatility forecasting models. We then examine the predictive power of the VIX and its two components for stock market returns and economic activity. The variance premium predicts stock returns but the conditional stock market variance predicts economic activity, and is more contemporaneously correlated with financial instability than is the variance premium.

JEL-codes: C22 C52 E32 G12 (search for similar items in EconPapers)
Date: 2013-04
New Economics Papers: this item is included in nep-fmk and nep-for
Note: AP
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Citations: View citations in EconPapers (17)

Published as Bekaert, Geert & Hoerova, Marie, 2014. "The VIX, the variance premium and stock market volatility," Journal of Econometrics, Elsevier, vol. 183(2), pages 181-192.

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Journal Article: The VIX, the variance premium and stock market volatility (2014)
Working Paper: The VIX, the variance premium and stock market volatility (2014)
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