Forecasting increases in the VIX: A time-varying long volatility hedge for equities

Adam Clements and Joanne Fuller (j.fuller@qut.edu.au)
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Joanne Fuller: QUT

No 88, NCER Working Paper Series from National Centre for Econometric Research

Abstract: Since the introduction of volatility derivatives, there has been growing interest in option implied volatility (IV). Many studies have examined informational content, and or forecast accuracy of IV, however there is relatively less work on directly modeling and forecasting IV. This paper uses a semi-parametric forecasting approaching to implement a time varying long volatility hedge to combine with a long equity position. It is found that such a equity-volatility combination improves the risk-return characteristics of a simple long equity position which is particularly successful during periods of market turmoil.

Keywords: Implied volatility; VIX; hedging; semi-parametric; forecasting (search for similar items in EconPapers)
JEL-codes: C22 G00 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2012-11-14
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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