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

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Author

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.

Publishing year

2009

Language

English

Pages

54-67

Publication/Series

The Journal of Alternative Investments

Volume

12

Issue

2

Document type

Journal article

Publisher

Instiutional Investor

Topic

  • Economics

Keywords

  • Forcasting
  • VIX
  • MCMC

Status

Published

ISBN/ISSN/Other

  • ISSN: 1520-3255