The importance of the volatility risk premium for volatility forecasting

Prokopczuk, M. and Wese Simen, C. (2014) The importance of the volatility risk premium for volatility forecasting. Journal of Banking and Finance, 40. pp. 303-320. ISSN 0378-4266 doi: 10.1016/j.jbankfin.2013.12.002

Abstract/Summary

In this paper, we study the role of the volatility risk premium for the forecasting performance of implied volatility. We introduce a non-parametric and parsimonious approach to adjust the model-free implied volatility for the volatility risk premium and implement this methodology using more than 20 years of options and futures data on three major energy markets. Using regression models and statistical loss functions, we find compelling evidence to suggest that the risk premium adjusted implied volatility significantly outperforms other models, including its unadjusted counterpart. Our main finding holds for different choices of volatility estimators and competing time-series models, underlying the robustness of our results.

Item Type	Article
URI	https://reading-clone.eprints-hosting.org/id/eprint/37069
Identification Number/DOI	10.1016/j.jbankfin.2013.12.002
Refereed	Yes
Divisions	Henley Business School > Finance and Accounting
Uncontrolled Keywords	Volatility forecasting; Volatility risk premium; Implied volatility
Publisher	Elsevier
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