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A re-examination of the predictability of stock returns and cash flows via the decomposition of VIX

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  • Yun, Jaeho

Abstract

This paper investigates return and cash flow predictability via the decomposition of VIX. The squared VIX index is decomposed into expected return variations (ERV) and variance risk premium (VRP). Without imposing a strong assumption on the dynamics of the return variations, I examine the predictability via the generalized method of moments (GMM) approach with appropriately chosen instruments. Empirical analysis shows the short-term return predictability of VRP and the short- and long-term cash flow predictability of ERV.

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  • Yun, Jaeho, 2020. "A re-examination of the predictability of stock returns and cash flows via the decomposition of VIX," Economics Letters, Elsevier, vol. 186(C).
    • Handle: RePEc:eee:ecolet:v:186:y:2020:i:c:s0165176519303799
    DOI: 10.1016/j.econlet.2019.108755
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    Cited by:

    1. Akhilesh Prasad & Priti Bakhshi, 2022. "Forecasting the Direction of Daily Changes in the India VIX Index Using Machine Learning," JRFM, MDPI, vol. 15(12), pages 1-26, November.
    2. Jungmu Kim & Yuen Jung Park, 2020. "Predictability of OTC Option Volatility for Future Stock Volatility," Sustainability, MDPI, vol. 12(12), pages 1-23, June.
    3. Salisu, Afees A. & Vo, Xuan Vinh, 2020. "Predicting stock returns in the presence of COVID-19 pandemic: The role of health news," International Review of Financial Analysis, Elsevier, vol. 71(C).

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    More about this item

    Keywords

    Return and cash flow predictability; VIX; Expected return variations; Variance risk premium; GMM;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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