The Information Content of the Implied Volatility Term Structure on Future Returns

European Financial Management, Forthcoming

50 Pages Posted: 20 Aug 2014 Last revised: 9 Dec 2017

Yaw-Huei Wang

National Taiwan University

Kuang-Chieh Yen

Soochow University

Date Written: December 6, 2017

Abstract

We derive the theoretical relation between the term structure of implied variance and the expected excess returns of the underlying asset. Adopting three alternative approaches to compile the variables representing the information on the implied volatility index level and term structure, we show the important role of the term structure in determining future excess returns of the S&P 500 index. Both the in-sample and out-of-sample analyses suggest that the information content of the term structure variable is significant and a strong complement to that of the level variable, especially for shorter-term excess returns.

Keywords: VIX term structure, Predictability, S&P 500 index returns

JEL Classification: G13, G14

Suggested Citation

Wang, Yaw-Huei and Yen, Kuang-Chieh, The Information Content of the Implied Volatility Term Structure on Future Returns (December 6, 2017). European Financial Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2483222 or http://dx.doi.org/10.2139/ssrn.2483222

Yaw-Huei Wang

National Taiwan University ( email )

Department and Graduate Institute of Finance
College of Management
Taipei, 106
Taiwan
+886233661092 (Phone)
+886283695581 (Fax)

Kuang-Chieh Yen (Contact Author)

Soochow University ( email )

No. 1 Shizi Street
Taipei, Jiangsu 215006
Taiwan

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