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

27 Pages Posted: 6 Mar 2019

See all articles by Yaw-Huei Wang

Yaw-Huei Wang

National Taiwan University; UNSW

Kuang-Chieh Yen

Soochow University, Taiwan

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Date Written: March 2019

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: predictability, S&P 500 index returns, VIX term structure

Suggested Citation

Wang, Yaw-Huei and Yen, Kuang-Chieh, The Information Content of the Implied Volatility Term Structure on Future Returns (March 2019). European Financial Management, Vol. 25, Issue 2, pp. 380-406, 2019, Available at SSRN: https://ssrn.com/abstract=3346001 or http://dx.doi.org/10.1111/eufm.12166

Yaw-Huei Wang (Contact Author)

National Taiwan University ( email )

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

UNSW ( email )

Sydney, NSW 2052
Australia

Kuang-Chieh Yen

Soochow University, Taiwan ( email )

56. kuei-yang St., Sec. 1
Taipei, Taiwan 10048
Taiwan

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