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Inferring volatility dynamics and risk premia from the S&P 500 and VIX markets

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  • Bardgett, Chris
  • Gourier, Elise
  • Leippold, Markus

Abstract

We estimate a flexible affine model using an unbalanced panel containing S&P 500 and VIX index returns and option prices and analyze the contribution of VIX options to the model’s in- and out-of-sample performance. We find that they contain valuable information on the risk-neutral conditional distributions of volatility at different time horizons, which is not spanned by the S&P 500 market. This information allows enhanced estimation of the variance risk premium. We gain new insights on the term structure of the variance risk premium, present a trading strategy exploiting these insights, and show how to improve S&P 500 return forecasts.

Suggested Citation

  • Bardgett, Chris & Gourier, Elise & Leippold, Markus, 2019. "Inferring volatility dynamics and risk premia from the S&P 500 and VIX markets," Journal of Financial Economics, Elsevier, vol. 131(3), pages 593-618.
    • Handle: RePEc:eee:jfinec:v:131:y:2019:i:3:p:593-618
    DOI: 10.1016/j.jfineco.2018.09.008
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    More about this item

    Keywords

    S&P 500 and VIX joint modeling; Volatility dynamics; Particle filter; Variance risk premium;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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