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Uncovering a positive risk-return relation: the role of implied volatility index

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  • Angelos Kanas

Abstract

We report empirical evidence suggesting a strong and positive risk-return relation for the daily S&P 100 market index if the implied volatility index is included as an exogenous variable in the conditional variance equation. This result holds for alternative GARCH specifications and conditional distributions. Monte Carlo evidence suggests that if implied volatility is not included, whilst is should be, the risk-return relation is more likely to be negative or weak. Copyright Springer Science+Business Media, LLC 2014

Suggested Citation

  • Angelos Kanas, 2014. "Uncovering a positive risk-return relation: the role of implied volatility index," Review of Quantitative Finance and Accounting, Springer, vol. 42(1), pages 159-170, January.
    • Handle: RePEc:kap:rqfnac:v:42:y:2014:i:1:p:159-170
    DOI: 10.1007/s11156-012-0317-9
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    Cited by:

    1. Mollick, André Varella & Sakaki, Hamid, 2019. "Exchange rates, oil prices and world stock returns," Resources Policy, Elsevier, vol. 61(C), pages 585-602.

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    More about this item

    Keywords

    S&P 100; Implied volatility index; GARCH-M; Risk-return relation; G12; C22;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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