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The VIX, the Variance Premium, and Expected Returns

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaperJournal articlepeer-review

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The VIX, the Variance Premium, and Expected Returns. / Osterrieder, Daniela; Ventosa-Santaulària, Daniel; Vera-Valdés, J. Eduardo.

In: Journal of Financial Econometrics, Vol. 17, No. 4, 2019, p. 517-558.

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaperJournal articlepeer-review

Harvard

Osterrieder, D, Ventosa-Santaulària, D & Vera-Valdés, JE 2019, 'The VIX, the Variance Premium, and Expected Returns', Journal of Financial Econometrics, vol. 17, no. 4, pp. 517-558. https://doi.org/10.1093/jjfinec/nby008

APA

Osterrieder, D., Ventosa-Santaulària, D., & Vera-Valdés, J. E. (2019). The VIX, the Variance Premium, and Expected Returns. Journal of Financial Econometrics, 17(4), 517-558. https://doi.org/10.1093/jjfinec/nby008

CBE

Osterrieder D, Ventosa-Santaulària D, Vera-Valdés JE. 2019. The VIX, the Variance Premium, and Expected Returns. Journal of Financial Econometrics. 17(4):517-558. https://doi.org/10.1093/jjfinec/nby008

MLA

Osterrieder, Daniela, Daniel Ventosa-Santaulària and J. Eduardo Vera-Valdés. "The VIX, the Variance Premium, and Expected Returns". Journal of Financial Econometrics. 2019, 17(4). 517-558. https://doi.org/10.1093/jjfinec/nby008

Vancouver

Osterrieder D, Ventosa-Santaulària D, Vera-Valdés JE. The VIX, the Variance Premium, and Expected Returns. Journal of Financial Econometrics. 2019;17(4):517-558. https://doi.org/10.1093/jjfinec/nby008

Author

Osterrieder, Daniela ; Ventosa-Santaulària, Daniel ; Vera-Valdés, J. Eduardo. / The VIX, the Variance Premium, and Expected Returns. In: Journal of Financial Econometrics. 2019 ; Vol. 17, No. 4. pp. 517-558.

Bibtex

@article{3e233308290445a987fef1342f22bd41,
title = "The VIX, the Variance Premium, and Expected Returns",
abstract = "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.",
keywords = "fractional integration, implied variance, integrated variance, persistent predictor, return prediction, risk-return trade-off, variance premium",
author = "Daniela Osterrieder and Daniel Ventosa-Santaul{\`a}ria and Vera-Vald{\'e}s, {J. Eduardo}",
year = "2019",
doi = "10.1093/jjfinec/nby008",
language = "English",
volume = "17",
pages = "517--558",
journal = "Journal of Financial Econometrics",
issn = "1479-8409",
publisher = "Oxford University Press",
number = "4",

}

RIS

TY - JOUR

T1 - The VIX, the Variance Premium, and Expected Returns

AU - Osterrieder, Daniela

AU - Ventosa-Santaulària, Daniel

AU - Vera-Valdés, J. Eduardo

PY - 2019

Y1 - 2019

N2 - 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.

AB - 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.

KW - fractional integration

KW - implied variance

KW - integrated variance

KW - persistent predictor

KW - return prediction

KW - risk-return trade-off

KW - variance premium

UR - http://www.scopus.com/inward/record.url?scp=85073877461&partnerID=8YFLogxK

U2 - 10.1093/jjfinec/nby008

DO - 10.1093/jjfinec/nby008

M3 - Journal article

AN - SCOPUS:85073877461

VL - 17

SP - 517

EP - 558

JO - Journal of Financial Econometrics

JF - Journal of Financial Econometrics

SN - 1479-8409

IS - 4

ER -