Volatility risk premia:Evidence from VIX

WU Xin-yu, ZHOU Hai-lin

Systems Engineering - Theory & Practice ›› 2014, Vol. 34 ›› Issue (s1) : 1-11.

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Systems Engineering - Theory & Practice ›› 2014, Vol. 34 ›› Issue (s1) : 1-11. DOI: 10.12011/1000-6788(2014)s1-1

Volatility risk premia:Evidence from VIX

  • WU Xin-yu, ZHOU Hai-lin
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Abstract

Finance literature has put much effort on studying the volatility risk premia. In this paper, we derive the corresponding implied VIX formula under the non-affine GARCH diffusion model, and develop an efficient importance sampling (EIS)-based joint maximum likelihood (ML) estimation method for the objective and risk-neutral parameters of the model using joint data on the S&P500 and VIX indices. Then a particle filter-based estimation method is developed for the latent volatility. Hence, it allows us to infer the volatility risk premia implied by the VIX. Monte Carlo simulation study shows that our proposed approach performs well. Empirical study based on the actual data demonstrates that the volatility risk is priced by the market and the volatility risk premia are negative, which imply that investors act risk averse in the market.

Key words

volatility risk premia / VIX / GARCH diffusion model / efficient importance sampling / particle filter

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WU Xin-yu , ZHOU Hai-lin. Volatility risk premia:Evidence from VIX. Systems Engineering - Theory & Practice, 2014, 34(s1): 1-11 https://doi.org/10.12011/1000-6788(2014)s1-1

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