This paper presents an innovative approach to extract Volatility Factors which predict the VIX, the S&P500 Realized Volatility (RV) and the Variance Risk Premium (VRP). The approach is innovative along two different dimensions, namely: (1) we extract Volatility Factors from panels of filtered volatilities — in particular large panels of univariate ARCH-type models and propose methods to estimate common Volatility Factors in the presence of estimation error and (2) we price equity volatility risk using factors which go beyond the equity class namely Volatility Factors extracted from panels of volatilities of short-run funding spreads. The role of these Volatility Factors is compared with the corresponding factors extracted from the panels of the above spreads as well as related factors proposed in the literature. Our monthly short-run funding spreads Volatility Factors provide both in- and out-of-sample predictive gains for forecasting the monthly VIX, RV as well as the equity premium, while the corresponding daily volatility factors via Mixed Data Sampling (MIDAS) models provide further improvements.
Andreou E. & Ghysels, E. (2021). Predicting the VIX and the volatility risk premium: The role of short-run funding spreads Volatility Factors. Journal of Econometrics, 220(2), 366-398. https://doi.org/10.1016/j.jeconom.2020.04.006