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VIX forecasting and variance risk premium: A new GARCH approach

Author

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  • Liu, Qiang
  • Guo, Shuxin
  • Qiao, Gaoxiu

Abstract

This paper proposes to forecast VIX under GARCH(1,1), GJR, and Heston–Nandi models, and to assess variance risk premium innovatively. The one-day out-of-sample VIXs, computed with traditional empirical GARCH parameters, turn out to be below the market VIXs by roughly 20–30% (10–13%) on average before (after) 22 September 2003. The underestimation is interpreted as a kind of variance risk premium, which for the later part of the data turns out to be significantly smaller. On the other hand, risk-neutral GARCH models can be obtained by calibration against the prior-day market VIX. For the same dataset, the risk-neutral parameters forecast the one-day out-of-sample VIXs with errors within −0.30 to 0.03% on average.

Suggested Citation

  • Liu, Qiang & Guo, Shuxin & Qiao, Gaoxiu, 2015. "VIX forecasting and variance risk premium: A new GARCH approach," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 314-322.
    • Handle: RePEc:eee:ecofin:v:34:y:2015:i:c:p:314-322
    DOI: 10.1016/j.najef.2015.10.001
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