Implied Volatility Measures As Indicators of Future Market Returns

11 Pages Posted: 9 May 2018 Last revised: 23 Jan 2019

See all articles by Roberto Bandelli

Roberto Bandelli

Wisdom Capital Asset Management

Wenye Wang

Columbia University - Mathematics of Finance

Date Written: January 2019

Abstract

We analyze the relationship between implied volatility and subsequent equity markets excess returns. We find that high readings of implied volatility have a strong correlation with positive and economically sizable returns in the subsequent 1, 5, and 20 trading days. Mid-level readings are generally associated with returns which are statistically positive but not economically significant. Low readings show a statistically meaningful link with negative but economically small returns. We also document that the statistical relationship with equity markets behavior is stronger when using the VIX as a measure of implied volatility instead of the implied volatility of at-the-money straddles.

Keywords: VIX, volatility, market returns, IV

JEL Classification: C1, G1

Suggested Citation

Bandelli, Roberto and Wang, Wenye, Implied Volatility Measures As Indicators of Future Market Returns (January 2019). Available at SSRN: https://ssrn.com/abstract=3173287 or http://dx.doi.org/10.2139/ssrn.3173287

Roberto Bandelli (Contact Author)

Wisdom Capital Asset Management ( email )

175 Varick St
New York, NY 10014
United States

Wenye Wang

Columbia University - Mathematics of Finance ( email )

116th St & Broadway
New York, NY 10027
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
193
Abstract Views
842
rank
160,534
PlumX Metrics