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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Bibliographic Details
Published in:Journal of financial economics Vol. 131; no. 3; pp. 593 - 618
Main Authors: Bardgett, Chris, Gourier, Elise, Leippold, Markus
Format: Journal Article
Language:English
Published: Amsterdam Elsevier B.V 01.03.2019
Elsevier Sequoia S.A
Subjects:
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
Online Access:Get full text
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Summary: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.
Bibliography:ObjectType-Article-1
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ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2018.09.008