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.
Bardgett, Chris