Realized GARCH, CBOE VIX, and the Volatility Risk Premium

Peter Hansen, Zhuo Huang (), Chen Tong and Tianyi Wang ()

Papers from arXiv.org

Abstract: We show that the Realized GARCH model yields close-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 a 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.

Date: 2021-12
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-fmk, nep-ore, nep-rmg and nep-upt
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Citations: View citations in EconPapers (1)

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Journal Article: Realized GARCH, CBOE VIX, and the Volatility Risk Premium (2024)
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