Economics at your fingertips  

A new government bond volatility index predictor for the U.S. equity premium

Zheyao Pan and Kam Fong Chan

Pacific-Basin Finance Journal, 2018, vol. 50, issue C, 200-215

Abstract: This study proposes a new predictor constructed under the state-preference asset pricing framework to forecast the U.S. monthly equity premium. The index, termed as the government bond volatility index or GBVX, reflects the Treasury implied volatility. The innovation in the GBVX delivers statistically and economically significant in-sample and out-of-sample predictive results over the recent 2000–2015 sample period. It yields a sizable increase in terminal wealth growth, Sharpe ratio, and utility gains. In addition, the predictive ability of the innovation in the GBVX is comparable to, and in a majority of cases, surpasses those of conventional predictors commonly used in the literature, as well as a range of historical and other implied volatility indices. The strong predictive ability of the innovation in the GBVX stems from its anticipation of cash flow news.

Keywords: Bond volatility index; Stock return predictability; Asset allocation; Out-of-sample test; Return decomposition (search for similar items in EconPapers)
JEL-codes: E43 G12 G13 G17 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
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:

Access Statistics for this article

Pacific-Basin Finance Journal is currently edited by K. Chan and S. Ghon Rhee

More articles in Pacific-Basin Finance Journal from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

Page updated 2018-11-10
Handle: RePEc:eee:pacfin:v:50:y:2018:i:c:p:200-215