Realised Co-Skewness of the VIX and S&P 500 and the Equity Premium

27 Pages Posted: 8 Jan 2014

See all articles by Zhi Liu

Zhi Liu

University of Macau

Junwei Liu

Xiamen University

Kent Wang

University of Queensland

Zhanglong Wang

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE)

Date Written: January 8, 2014

Abstract

We provide theoretical and empirical justifications for linking the realised co-skewness between the VIX and the S&P 500 to conditional equity premiums. The realised co-skewness, as a measure of hedging benefits, shows a significant (and independent to that of the variance risk premium) negative prediction for the next month equity premium. We also present a new measure of higher co-moments using high frequency data under the general jump diffusion model. The estimator is robust to the presence of market microstructure noise and can be extended to other co-moment measurement in current risk management practices.

Keywords: Itˆo Variance hedging; Co-skewness; Stock return prediction; High frequency data; Market microstructure noise; Pre-averaging

JEL Classification: C13, C14, G10, G12

Suggested Citation

Liu, Zhi and Liu, Junwei and Wang, Kent and Wang, Zhanglong, Realised Co-Skewness of the VIX and S&P 500 and the Equity Premium (January 8, 2014). Asian Finance Association (AsianFA) 2014 Conference Paper. Available at SSRN: https://ssrn.com/abstract=2376077 or http://dx.doi.org/10.2139/ssrn.2376077

Zhi Liu (Contact Author)

University of Macau ( email )

P.O. Box 3001
Macau

Junwei Liu

Xiamen University ( email )

Xiamen, Fujian 361005
China

Kent Wang

University of Queensland ( email )

Australia

Zhanglong Wang

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

A 307, Economics Building
Xiamen, Fujian 10246
China

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