VIX forecasting and variance risk premium: A new GARCH approach

Qiang Liu, Shuxin Guo and Gaoxiu Qiao

The North American Journal of Economics and Finance, 2015, vol. 34, issue C, 314-322

Abstract: This paper proposes to forecast VIX under GARCH(1,1), GJR, and Heston–Nandi models, and to assess variance risk premium innovatively. The one-day out-of-sample VIXs, computed with traditional empirical GARCH parameters, turn out to be below the market VIXs by roughly 20–30% (10–13%) on average before (after) 22 September 2003. The underestimation is interpreted as a kind of variance risk premium, which for the later part of the data turns out to be significantly smaller. On the other hand, risk-neutral GARCH models can be obtained by calibration against the prior-day market VIX. For the same dataset, the risk-neutral parameters forecast the one-day out-of-sample VIXs with errors within −0.30 to 0.03% on average.

Keywords: Out-of-sample one-day VIX forecasting; Variance risk premium; GARCH(1,1); GJR GARCH; Heston–Nandi GARCH (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:34:y:2015:i:c:p:314-322

DOI: 10.1016/j.najef.2015.10.001

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