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The VIX, the Variance Premium, and Expected Returns
| Content Provider | Semantic Scholar |
|---|---|
| Author | Osterrieder, Daniela Ventosa-Santaulària, Daniel Vera-Vald'es, J. Eduardo |
| Copyright Year | 2019 |
| Abstract | Existing studies find conflicting estimates of the risk-return relation. We show that the trade-off parameter is inconsistently estimated when VIX measures risk. The inconsistency arises from a misspecified, unbalanced, and endogenous return regression. These problems are eliminated if risk is captured by the variance premium instead. Yet, the variance premium is unobserved. Accordingly, we propose a GMM estimator that produces consistent estimates without observing the variance premium. Using this method, we find a positive risk-return trade-off and long-run return predictability. Our approach outperforms commonly used riskreturn estimation methods, and reveals a significant link between the variance premium and economic uncertainty. |
| Starting Page | 517 |
| Ending Page | 558 |
| Page Count | 42 |
| File Format | PDF HTM / HTML |
| DOI | 10.1093/jjfinec/nby008 |
| Volume Number | 17 |
| Alternate Webpage(s) | https://vbn.aau.dk/ws/portalfiles/portal/312273869/VIX_VP_Predictability.pdf |
| Alternate Webpage(s) | https://doi.org/10.1093/jjfinec%2Fnby008 |
| Language | English |
| Access Restriction | Open |
| Content Type | Text |
| Resource Type | Article |
