Inferring volatility dynamics and risk premia from the S&P 500 and VIX markets

We estimate a flexible affine model using an unbalanced panel containing S&P 500 and VIX index returns and option prices and analyze the contribution of VIX options to the model’s in- and out-of-sample performance. We find that they contain valuable information on the risk-neutral conditional di...

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Vydáno v:Journal of financial economics Ročník 131; číslo 3; s. 593 - 618
Hlavní autoři: Bardgett, Chris, Gourier, Elise, Leippold, Markus
Médium: Journal Article
Jazyk:angličtina
Vydáno: Amsterdam Elsevier B.V 01.03.2019
Elsevier Sequoia S.A
Témata:
Economic models
Financial economics
Markets
Particle filter
Prices
Risk
Risk assessment
Risk premiums
S&P 500 and VIX joint modeling
Securities markets
Securities prices
Stock market indexes
Trading
Variance risk premium
Volatility
Volatility dynamics
C58
S&P 500 and VIX joint modeling
G13
G12
Particle filter
Variance risk premium
Volatility dynamics
ISSN:0304-405X, 1879-2774
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Popis
Shrnutí:We estimate a flexible affine model using an unbalanced panel containing S&P 500 and VIX index returns and option prices and analyze the contribution of VIX options to the model’s in- and out-of-sample performance. We find that they contain valuable information on the risk-neutral conditional distributions of volatility at different time horizons, which is not spanned by the S&P 500 market. This information allows enhanced estimation of the variance risk premium. We gain new insights on the term structure of the variance risk premium, present a trading strategy exploiting these insights, and show how to improve S&P 500 return forecasts.
Bibliografie:ObjectType-Article-1
SourceType-Scholarly Journals-1
ObjectType-Feature-2
content type line 14
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2018.09.008