Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/154108
Authors: 
Bekaert, Geert
Hoerova, Marie
Year of Publication: 
2014
Series/Report no.: 
ECB Working Paper 1675
Abstract: 
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. We evaluate a plethora of state-of-the-art volatility forecasting models to produce an accurate measure of the conditional variance. We then examine the predictive power of the VIX and its two components for stock market returns, economic activity and financial instability. The variance premium predicts stock returns while the conditional stock market variance predicts economic activity and has a relatively higher predictive power for financial instability than does the variance premium.
Subjects: 
economic uncertainty
financial instability
option implied volatility
realized volatility
risk aversion
risk-return trade-off
stock return predictability
variance risk premium
VIX
JEL: 
C22
C52
G12
E32
Document Type: 
Working Paper

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