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Forecasting increases in the VIX: A time-varying long volatility hedge for equities

Author

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  • Adam Clements

    (QUT)

  • Joanne Fuller

    (QUT)

Abstract

Since the introduction of volatility derivatives, there has been growing interest in option implied volatility (IV). Many studies have examined informational content, and or forecast accuracy of IV, however there is relatively less work on directly modeling and forecasting IV. This paper uses a semi-parametric forecasting approaching to implement a time varying long volatility hedge to combine with a long equity position. It is found that such a equity-volatility combination improves the risk-return characteristics of a simple long equity position which is particularly successful during periods of market turmoil.

Suggested Citation

  • Adam Clements & Joanne Fuller, 2012. "Forecasting increases in the VIX: A time-varying long volatility hedge for equities," NCER Working Paper Series 88, National Centre for Econometric Research.
    • Handle: RePEc:qut:auncer:2012_92
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    File URL: http://www.ncer.edu.au/papers/documents/WP88.pdf
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    References listed on IDEAS

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    1. Chris Brooks & M. Currim Oozeer, 2002. "Modelling the Implied Volatility of Options on Long Gilt Futures," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 29(1&2), pages 111-137.
    2. Chris Brooks & M. Currim Oozeer, 2002. "Modelling the Implied Volatility of Options on Long Gilt Futures," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 29(1‐2), pages 111-137.
    3. Mizrach, B, 1992. "Multivariate Nearest-Neighbor Forecasts of EMS Exchange Rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages 151-163, Suppl. De.
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    5. Becker Ralf & Clements Adam E & Hurn Stan, 2011. "Semi-Parametric Forecasting of Realized Volatility," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 15(3), pages 1-23, May.
    6. Lamoureux, Christopher G & Lastrapes, William D, 1993. "Forecasting Stock-Return Variance: Toward an Understanding of Stochastic Implied Volatilities," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 293-326.
    7. Blair, Bevan J. & Poon, Ser-Huang & Taylor, Stephen J., 2001. "Forecasting S&P 100 volatility: the incremental information content of implied volatilities and high-frequency index returns," Journal of Econometrics, Elsevier, vol. 105(1), pages 5-26, November.
    8. Dotsis, George & Psychoyios, Dimitris & Skiadopoulos, George, 2007. "An empirical comparison of continuous-time models of implied volatility indices," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3584-3603, December.
    9. Satchell, Stephen & Knight, John, 2007. "Forecasting Volatility in the Financial Markets," Elsevier Monographs, Elsevier, edition 3, number 9780750669429.
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    11. Hwang, S. & Satchell, S. E., 1998. "Implied Volatility Forecasting: A Comparison of Different Procedures," Accounting and Finance Discussion Papers 98-af38, Faculty of Economics, University of Cambridge.
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    Cited by:

    1. Fernandes, Marcelo & Medeiros, Marcelo C. & Scharth, Marcel, 2014. "Modeling and predicting the CBOE market volatility index," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 1-10.
    2. Psaradellis, Ioannis & Sermpinis, Georgios, 2016. "Modelling and trading the U.S. implied volatility indices. Evidence from the VIX, VXN and VXD indices," International Journal of Forecasting, Elsevier, vol. 32(4), pages 1268-1283.
    3. João H. Gonçalves Mazzeu & Helena Veiga & Massimo B. Mariti, 2019. "Modeling and forecasting the oil volatility index," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 38(8), pages 773-787, December.
    4. Qiao, Gaoxiu & Jiang, Gongyue & Yang, Jiyu, 2022. "VIX term structure forecasting: New evidence based on the realized semi-variances," International Review of Financial Analysis, Elsevier, vol. 82(C).

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    More about this item

    Keywords

    Implied volatility; VIX; hedging; semi-parametric; forecasting;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G00 - Financial Economics - - General - - - General

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