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The VIX, the Variance Premium and Stock Market Volatility

Listed author(s):
  • Geert Bekaert
  • Marie Hoerova

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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File URL: http://www.nber.org/papers/w18995.pdf
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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
Publication status: published as Bekaert, Geert & Hoerova, Marie, 2014. "The VIX, the variance premium and stock market volatility," Journal of Econometrics, Elsevier, vol. 183(2), pages 181-192.
Handle: RePEc:nbr:nberwo:18995
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