DP10236 Predicting the VIX and the Volatility Risk Premium: What's Credit and Commodity Volatility Risk Got To Do With It?

Author(s): Elena Andreou, Eric Ghysels
Publication Date: November 2014
Keyword(s): ARCH filters, Factor asset pricing models
JEL(s): C2, C5, G1
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10236

This paper presents an innovative approach to extracting factors which are shown to predict the VIX, the S&P 500 Realized Volatility and the Variance Risk Premium. The approach is innovative along two different dimensions, namely: (1) we extract factors from panels of filtered volatilities - in particular large panels of univariate financial asset ARCH-type models and (2) we price equity volatility risk using factors which go beyond the equity class. These are volatility factors extracted from panels of volatilities of short-term funding and long-run corporate spreads as well as volatilities of energy and metals commodities returns and sport/future spreads.