Abstract
This paper proposed a new way to measure variance risk premium by applying the fractional cointegration relationship between implied variance and realized variance. To find the fractional cointegration coefficient between implied variance and realized variance, we proposed a searching method by minimizing the score test statistic proposed by Robinson(1994). We used daily, weekly and monthly data of 5 stock market indexes (SP500, SP100, DJIA, NASDAQ100 and Russell2000) and their volatility indexes from CBOE. We find our new measurement could improve the return prediction power of variance risk premium both in-sample statically and out-of-sample dynamically, and the result is robust for the monthly data among all 5 indexes.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
