The VIX, the variance premium and stock market volatility
Marie Hoerova () and
Geert Bekaert ()
No 1675, Working Paper Series from European Central Bank
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. JEL Classification: C22, C52, G12, E32
Keywords: economic uncertainty; financial instability; option implied volatility; realized volatility; risk-return trade-off; risk aversion; stock return predictability; variance risk premium; VIX (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk, nep-for and nep-rmg
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Journal Article: The VIX, the variance premium and stock market volatility (2014)
Working Paper: The VIX, the Variance Premium and Stock Market Volatility (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20141675
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