Predicting the VIX and the Volatility Risk Premium: What's Credit and Commodity Volatility Risk Got to Do with It?
51 Pages Posted: 16 Oct 2014
Date Written: October 14, 2014
This paper presents an innovative approach to extracting factors which are shown to predict the VIX, the S&P 500 Realized Volatility and the Variance Risk Premium. The approach is innovative along two different dimensions, namely: (1) we extract factors from panels of filtered volatilities - in particular large panels of univariate financial asset ARCH-type models and (2) we price equity volatility risk using factors which go beyond the equity class. These are volatility factors extracted from panels of volatilities of short-term funding and long-run corporate spreads as well as volatilities of energy and metals commodities returns and sport/future spreads.
Keywords: Factor asset pricing models, ARCH filters
JEL Classification: C2, C5, G1
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