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The VIX, the Variance Premium and Stock Market Volatility

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  • Geert Bekaert
  • Marie Hoerova

Abstract

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. The latter is increasing in risk aversion in a wide variety of economic settings. We tackle several measurement issues assessing a plethora of state-of-the-art volatility forecasting models. We then examine the predictive power of the VIX and its two components for stock market returns and economic activity. The variance premium predicts stock returns but the conditional stock market variance predicts economic activity, and is more contemporaneously correlated with financial instability than is the variance premium.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18995.

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Date of creation: Apr 2013
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Handle: RePEc:nbr:nberwo:18995

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Cited by:
  1. Geert Bekaert & Marie Hoerova & Marco Lo Duca, 2010. "Risk, Uncertainty and Monetary Policy," NBER Working Papers 16397, National Bureau of Economic Research, Inc.
  2. Miguel Ampudia & Michael Ehrmann, 2014. "Macroeconomic Experiences and Risk Taking of Euro Area Households," Working Papers 14-10, Bank of Canada.

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