The VIX, the Variance Premium, and Expected Returns

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  • Daniela Osterrieder
  • Daniel Ventosa-Santaulària, Centro de Investigación y Docencia Económicas (CIDE
  • ,
  • J. Eduardo Vera-Valdés, Aalborg Universitet

Existing studies find conflicting estimates of the risk-return relation. We show that the trade-off parameter is inconsistently estimated when observed or estimated conditional variances measure risk. The inconsistency arises from misspecified, unbalanced, and endogenous return regressions. These problems are eliminated if risk is captured by the variance premium (VP) instead; it is unobservable, however. We propose a 2SLS estimator that produces consistent estimates without observing the VP. Using this method, we find a positive risk-return trade-off and long-run return predictability. Our approach outperforms commonly used risk-return estimation methods, and reveals a significant link between the VP and economic uncertainty.

OriginalsprogEngelsk
TidsskriftJournal of Financial Econometrics
Vol/bind17
Nummer4
Sider (fra-til)517-558
Antal sider42
ISSN1479-8409
DOI
StatusUdgivet - 2019

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