The VIX, the variance premium and stock market volatility

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 1675

Classification and Topics

• Classification: Wirtschaft ; Single Equation Models; Single Variables: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes ; Model Evaluation, Validation, and Selection ; Asset Pricing; Trading Volume; Bond Interest Rates ; Business Fluctuations; Cycles
• Subject: economic uncertainty ; financial instability ; option implied volatility ; realized volatility ; risk aversion ; risk-return trade-off ; stock return predictability ; variance risk premium ; VIX

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bekaert, Geert ; Hoerova, Marie
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/154108
• Last update: 10.03.2025, 11:44 AM CET