Download This PaperExpected and Realized Returns on Volatility
70 Pages Posted: 14 May 2020 Last revised: 19 Aug 2023
Date Written: November 3, 2020
Abstract
Expected returns on market volatility, which can be obtained from VIX futures in
closed form using standard models, positively predict subsequent multiperiod realized
volatility returns. Volatility returns are negative on average. Following increases in
volatility, expected volatility returns and subsequent multiperiod realized volatility
returns become more negative. Expected volatility returns also negatively predict
S&P 500 index returns, because realized volatility returns are negatively correlated
with index returns. The results are robust to a wide range of variations in the empirical
setup and to small-sample biases.
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