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

Vilhelmsson, Anders LU and Nossman, Marcus LU (2009) In The Journal of Alternative Investments 12(2). p.54-67
Abstract
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... (More)
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. (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Contribution to journal
publication status
in press
subject
keywords
Forcasting, VIX, MCMC
in
The Journal of Alternative Investments
volume
12
issue
2
pages
54 - 67
publisher
Instiutional Investor
external identifiers
  • scopus:77955860265
ISSN
1520-3255
DOI
10.3905/JAI.2009.12.2.054
language
English
LU publication?
yes
id
321d5326-41df-47ed-af19-a971455a0438 (old id 1451848)
date added to LUP
2009-08-04 10:14:49
date last changed
2017-02-12 03:56:21
@article{321d5326-41df-47ed-af19-a971455a0438,
  abstract     = {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.},
  author       = {Vilhelmsson, Anders and Nossman, Marcus},
  issn         = {1520-3255},
  keyword      = {Forcasting,VIX,MCMC},
  language     = {eng},
  number       = {2},
  pages        = {54--67},
  publisher    = {Instiutional Investor},
  series       = {The Journal of Alternative Investments},
  title        = {Is the VIX futures market able to predict the VIX index? A test of the expectation hypothesis},
  url          = {http://dx.doi.org/10.3905/JAI.2009.12.2.054},
  volume       = {12},
  year         = {2009},
}