The VIX Premium
Review of Financial Studies, Forthcoming
57 Pages Posted: 13 Sep 2014 Last revised: 7 Jun 2018
Date Written: May 15, 2018
Ex-ante estimates of the volatility premium embedded in VIX futures, known as the VIX premium, fall or stay flat when ex-ante measures of risk rise. This is not an artifact of mismeasurement: 1) Ex-ante premiums reliably predict ex-post returns to VIX futures with a coefficient near one, and 2) Falling ex-ante premiums predict increasing ex-post market and investment risk, creating profitable trading opportunities. Falling hedging demand helps explain this behavior, as premiums and trader exposures tend to fall together when risk rises. These facts provide a puzzle for theories of why investors hedge volatility.
Keywords: VIX, volatility, variance risk premium
JEL Classification: G11, G12, G13
Suggested Citation: Suggested Citation