Inferring volatility dynamics and risk-premia from the S&P500 and VIX markets

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. Link to the article

BARDGETT, C., GOURIER, E. and LEIPPOLD, M. (2019). Inferring volatility dynamics and risk-premia from the S&P500 and VIX markets. Journal of Financial Economics, 131(3), pp. 593-618.

Keywords : #S&P-500-and-VIX-joint-modeling, #Volatility-dynamics, #Particle-filter, #Variance-risk-premium