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The VIX, the variance premium and stock market volatility. (English) Zbl 1312.91091

Summary: We decompose the squared VIX index, derived from US S&P500 options prices, into the conditional variance of stock returns and the equity variance premium. We evaluate a plethora of state-of-the-art volatility forecasting models to produce an accurate measure of the conditional variance. We then examine the predictive power of the VIX and its two components for stock market returns, economic activity and financial instability. The variance premium predicts stock returns while the conditional stock market variance predicts economic activity and has a relatively higher predictive power for financial instability than does the variance premium.

MSC:

91G70 Statistical methods; risk measures
91B82 Statistical methods; economic indices and measures
91G20 Derivative securities (option pricing, hedging, etc.)
91B70 Stochastic models in economics

Software:

PcGets; PcGive
PDFBibTeX XMLCite
Full Text: DOI Link

References:

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