The Information Content of the Implied Volatility Term Structure on Future Returns
27 Pages Posted: 6 Mar 2019
Date Written: March 2019
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
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