The VIX, the Variance Premium and Stock Market Volatility

38 Pages Posted: 17 Apr 2013 Last revised: 17 Sep 2015

Geert Bekaert

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Marie Hoerova

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 4 versions of this paper

Date Written: December 1, 2013

Abstract

We decompose the squared VIX index, derived from US S&P500 options prices, into the conditional variance of stock returns and the equity variance premium. We evaluate a plethora of state-of-the-art volatility forecasting models to produce an accurate measure of the conditional variance. We then examine the predictive power of the VIX and its two components for stock market returns, economic activity and financial instability. The variance premium predicts stock returns while the conditional stock market variance predicts economic activity and has a relatively higher predictive power for financial instability than does the variance premium.

Keywords: option implied volatility, realized volatility, VIX, variance risk premium, risk aversion, stock return predictability, risk-return trade-off, economic uncertainty, financial instability

JEL Classification: C22, C52, G12, E32

Suggested Citation

Bekaert, Geert and Hoerova, Marie, The VIX, the Variance Premium and Stock Market Volatility (December 1, 2013). Journal of Econometrics, Vol. 183, No. 2, pp. 181-192, December, 2014. Available at SSRN: https://ssrn.com/abstract=2252209 or http://dx.doi.org/10.2139/ssrn.2252209

Geert Bekaert

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Marie Hoerova (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Paper statistics

Downloads
1,341
Rank
6,474
Abstract Views
5,794