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The importance of the volatility risk premium for volatility forecasting

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  • Prokopczuk, Marcel
  • Wese Simen, Chardin

Abstract

In this paper, we study the role of the volatility risk premium for the forecasting performance of implied volatility. We introduce a non-parametric and parsimonious approach to adjust the model-free implied volatility for the volatility risk premium and implement this methodology using more than 20years of options and futures data on three major energy markets. Using regression models and statistical loss functions, we find compelling evidence to suggest that the risk premium adjusted implied volatility significantly outperforms other models, including its unadjusted counterpart. Our main finding holds for different choices of volatility estimators and competing time-series models, underlying the robustness of our results.

Suggested Citation

  • Prokopczuk, Marcel & Wese Simen, Chardin, 2014. "The importance of the volatility risk premium for volatility forecasting," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 303-320.
    • Handle: RePEc:eee:jbfina:v:40:y:2014:i:c:p:303-320
    DOI: 10.1016/j.jbankfin.2013.12.002
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    More about this item

    Keywords

    Volatility forecasting; Volatility risk premium; Implied volatility;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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