The VIX, the variance premium and stock market volatility

Geert Bekaert and Marie Hoerova

Journal of Econometrics, 2014, vol. 183, issue 2, 181-192

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. We evaluate a plethora of state-of-the-art volatility forecasting models to produce an accurate measure of the conditional variance. We then examine the predictive power of the VIX and its two components for stock market returns, economic activity and financial instability. The variance premium predicts stock returns while the conditional stock market variance predicts economic activity and has a relatively higher predictive power for financial instability than does the variance premium.

Keywords: Option implied volatility; Realized volatility; VIX; Variance risk premium; Risk aversion; Stock return predictability; Risk–return trade-off; Economic uncertainty; Financial instability (search for similar items in EconPapers)
JEL-codes: C22 C52 E32 G12 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (388)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304407614001110
Full text for ScienceDirect subscribers only

Related works:
Working Paper: The VIX, the variance premium and stock market volatility (2014)
Working Paper: The VIX, the Variance Premium and Stock Market Volatility (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:183:y:2014:i:2:p:181-192

DOI: 10.1016/j.jeconom.2014.05.008

Access Statistics for this article

Journal of Econometrics is currently edited by T. Amemiya, A. R. Gallant, J. F. Geweke, C. Hsiao and P. M. Robinson

More articles in Journal of Econometrics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().