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The importance of the volatility risk premium for volatility forecasting

Marcel Prokopczuk () and Chardin Wese Simen

Journal of Banking & Finance, 2014, vol. 40, issue C, 303-320

Abstract: In this paper, we study the role of the volatility risk premium for the forecasting performance of implied volatility. We introduce a non-parametric and parsimonious approach to adjust the model-free implied volatility for the volatility risk premium and implement this methodology using more than 20years of options and futures data on three major energy markets. Using regression models and statistical loss functions, we find compelling evidence to suggest that the risk premium adjusted implied volatility significantly outperforms other models, including its unadjusted counterpart. Our main finding holds for different choices of volatility estimators and competing time-series models, underlying the robustness of our results.

Keywords: Volatility forecasting; Volatility risk premium; Implied volatility (search for similar items in EconPapers)
JEL-codes: G13 G17 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1016/j.jbankfin.2013.12.002

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Handle: RePEc:eee:jbfina:v:40:y:2014:i:c:p:303-320