Realized GARCH, CBOE VIX, and the Volatility Risk Premium

Peter Hansen, Zhuo Huang, Chen Tong and Tianyi Wang

Journal of Financial Econometrics, 2024, vol. 22, issue 1, 187-223

Abstract: We show that the realized GARCH model yields closed-form expression for both the volatility index (VIX) and the volatility risk premium (VRP). The realized GARCH model is driven by two shocks, a return shock and a volatility shock, and these are natural state variables in the stochastic discount factor (SDF). The volatility shock endows the exponentially affine SDF with compensation for volatility risk. This leads to dissimilar dynamic properties under the physical and risk-neutral measures that can explain time-variation in the VRP. In an empirical application with the S&P 500 returns, the VIX, and the VRP, we find that the realized GARCH model significantly outperforms conventional GARCH models.

Keywords: high frequency data; realized GARCH; realized variance; volatility risk premium; VIX (search for similar items in EconPapers)
JEL-codes: C10 C22 C80 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (2)

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Working Paper: Realized GARCH, CBOE VIX, and the Volatility Risk Premium (2021)
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