Improving the predictability of real economic activity and asset returns with forward variances inferred from option portfolios

Bakshi, Gurdip; Panayotov, George; Skoulakis, Georgios

doi:10.1016/j.jfineco.2011.01.002

Cited by 91 publications

(44 citation statements)

References 98 publications

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“…becomes more negative) as the forward variance or the forward variance factor increases. This is in line with Bakshi et al (2011) who document that high values of the front end forward variance is associated with contracting economic activity and confirms the countercyclicality of the VRP.…”

Section: Economic Conditions Model and Forward Variancesupporting

confidence: 90%

How Does the Market Variance Risk Premium Vary Over Time? Evidence from S&P 500 Variance Swap Investment Returns

Konstantinidi

Skiadopoulos

2014

SSRN Journal

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Section: Economic Conditions Model and Forward Variancesupporting

confidence: 90%

How Does the Market Variance Risk Premium Vary Over Time? Evidence from S&P 500 Variance Swap Investment Returns

Konstantinidi

Skiadopoulos

2014

SSRN Journal

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“…Christoffersen, Jacobs, and Chang (2011) review the vast literature that uses option-implied information in forecasting, including for returns predictability. 9 Our approach is most closely related to Bakshi, Panayotov, and Skoulakis (2011). They study the predictive content of the 1-month and 2-month forward variances for SP500 and Treasury bill returns.…”

Section: The Factor Structure Extends To Skewness and Kurtosismentioning

confidence: 99%

Risk Premium, Variance Premium, and the Maturity Structure of Uncertainty

et al. 2013

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Expected returns vary when investors face time-varying investment opportunities. Longrun risk models (Bansal and Yaron 2004) and no-arbitrage affine models (Duffie, Pan, and Singleton 2000) emphasize sources of risk that are not observable to the econometrician. We show that, for both classes of models, the term structure of risk implicit in option prices can reveal these risk factors ex-ante. Empirically, we construct the variance term structure implied in SP500 option prices. The variance term structure reveal two important drivers of the bond premium, the equity premium, and the variance premium, jointly. We also consider the term structure of higher-order risks as measured by skewness and kurtosis and still find that two factors are sufficient to summarize the information content from the term structure of risks. Overall, our results bode well for the ability of structural models to explain risk-returns trade-offs across different markets using only very few sources of risk. JEL classification: G12, G13 Bank classification: Financial markets; Asset pricing RésuméLes rendements espérés varient lorsque les occasions de placement qui s'offrent aux investisseurs ne sont pas constantes dans le temps. Les modèles avec risque de long terme (Bansal et Yaron, 2004) et les modèles affines basés sur l'absence d'arbitrage (Duffie, Pan et Singleton, 2000) mettent l'accent sur des sources de risque qui échappent à l'observation de l'économètre. Les auteurs montrent que, pour chacune de ces classes de modèles, la structure par terme des risques implicitement contenue dans les prix d'options peut révéler ces facteurs de risque a priori. De manière empirique, les auteurs construisent la structure par terme de la variance à partir des prix des options sur l'indice SP500. Cette structure par terme fait ressortir deux importants facteurs qui déterminent, conjointement, la prime obligataire, la prime sur actions et la prime liée à la variance. Les auteurs étudient par ailleurs la structure par terme des risques d'ordre supérieur quantifiés d'après les coefficients d'asymétrie et d'aplatissement. Là aussi, ils concluent que deux facteurs suffisent pour résumer le contenu informatif de la structure par terme des risques. Dans l'ensemble, les résultats obtenus augurent bien de la capacité des modèles structurels à rendre compte, à l'aide d'un nombre limité de facteurs, des arbitrages risquerendement qui s'exercent sur différents marchés.

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“…Thus, VIX contains information beyond the actual realized variance. Similarly, Bakshi, Panayotov, and Skoulakis (2016) and Luo and Zhang (2017) show that forward variances constructed from VIX are predictive of U. S. real economic activity and stock market returns. The variance risk premium is the compensation investors pay for assets that perform well under heightened stock market uncertainty, and it reflects the actual option market transactions of investors, which makes VIX reflective of investors' risk aversion.…”

Section: Literature Review: Vix As Risk Indicatormentioning

confidence: 94%

Interrelations of U.S. market fears and emerging markets returns: Global evidence

Sarwar

Khan

2018

Int. J Fin Econ

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We investigate the interrelations between U.S. stock market uncertainty (VIX) and equity returns in several emerging markets (EMs) in an integrated multivariate system that allows the interactions through the first and second moments of VIX and return processes. Our VARMAX‐CCC‐QGARCH model finds significant interactions in the covariance terms of VIX and EM returns, which facilitate risk transmission. Changes in VIX negatively affect EM returns, which also significantly affect VIX changes. We find that VIX changes and EM returns collectively have predictive ability for each other. Further, VIX shocks contribute 22–42% to the prediction error of EM returns. Our results underscore the importance of capturing interactions between VIX changes and EM returns through their variance–covariance matrix and have important implications for global diversification, flight‐to‐safety choices, and hedging the cross‐market risks.

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Improving the predictability of real economic activity and asset returns with forward variances inferred from option portfolios

Cited by 91 publications

References 98 publications

How Does the Market Variance Risk Premium Vary Over Time? Evidence from S&P 500 Variance Swap Investment Returns

How Does the Market Variance Risk Premium Vary Over Time? Evidence from S&P 500 Variance Swap Investment Returns

Risk Premium, Variance Premium, and the Maturity Structure of Uncertainty

Interrelations of U.S. market fears and emerging markets returns: Global evidence

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