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Is the VIX futures market able to predict the VIX index? A test of the expectation hypothesis

In English

Författare

Summary, in English

This paper tests the expectation hypothesis by using the volatility index VIX and the futures written on that index. Because the VIX index is negatively correlated with the S&P 500 index returns the VIX futures price should contain a negative risk premium, which we do confirm in this study. When the futures price is not adjusted with the risk premium, the expectation hypothesis is rejected at the 5 percent significance level for 20 of 21 forecast horizons. However when we adjust the futures price with the risk premium, obtained from a stochastic volatility model, the expectation hypothesis cannot be rejected. Further, we find that the risk premium adjusted futures price forecasts the direction of the VIX index well. The one day ahead forecast predicts the direction correctly 73 percent of the time.

Publiceringsår

2009

Språk

Engelska

Sidor

54-67

Publikation/Tidskrift/Serie

The Journal of Alternative Investments

Volym

12

Issue

2

Dokumenttyp

Artikel i tidskrift

Förlag

Instiutional Investor

Ämne

  • Economics

Nyckelord

  • Forcasting
  • VIX
  • MCMC

Status

Published

ISBN/ISSN/Övrigt

  • ISSN: 1520-3255