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


Bardgett, Chris; Gourier, Elise; Leippold, Markus (2019). Inferring volatility dynamics and risk premia from the S&P 500 and VIX markets. Journal of Financial Economics, 131(3):593-618.

Abstract

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.

Abstract

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.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:1 March 2019
Deposited On:05 Jun 2019 07:18
Last Modified:25 Sep 2019 00:35
Publisher:Elsevier
ISSN:0304-405X
OA Status:Closed
Publisher DOI:https://doi.org/10.1016/j.jfineco.2018.09.008
Related URLs:https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2296826 (Organisation)
https://www.sciencedirect.com/science/article/pii/S0304405X18302605 (Publisher)
Other Identification Number:merlin-id:15909

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