Premium
The information content of the implied volatility term structure on future returns
Author(s) -
Wang YawHuei,
Yen KuangChieh
Publication year - 2019
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/eufm.12166
Subject(s) - volatility (finance) , econometrics , economics , term (time) , variable (mathematics) , implied volatility , financial economics , mathematics , physics , mathematical analysis , quantum mechanics
We derive the theoretical relation between the term structure of implied variance and the expected excess returns of the underlying asset. Adopting three alternative approaches to compile the variables representing the information on the implied volatility index level and term structure, we show the important role of the term structure in determining future excess returns of the S&P 500 index. Both the in‐sample and out‐of‐sample analyses suggest that the information content of the term structure variable is significant and a strong complement to that of the level variable, especially for shorter‐term excess returns.