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Market-Based Solutions to Vital Economic Issues
Research
Oct 16, 2014

Predicting the VIX and the Volatility Risk Premium: What’s Credit and Commodity Volatility Risk Got to Do with It?

Abstract

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.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals.


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