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    Rights statement: This is the peer reviewed version of the following article: Li, Z, Izzeldin, M, Yao, X. Return predictability of variance differences: A fractionally cointegrated approach. J Futures Markets. 2020; 40: 1072– 1089. https://doi.org/10.1002/fut.22110 which has been published in final form athttps://onlinelibrary.wiley.com/doi/abs/10.1002/fut.22110 This article may be used for non-commercial purposes in accordance With Wiley Terms and Conditions for self-archiving.

    Accepted author manuscript, 460 KB, PDF document

    Embargo ends: 27/03/22

    Available under license: CC BY-NC: Creative Commons Attribution-NonCommercial 4.0 International License

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Return predictability of variance differences: A fractionally cointegrated approach

Research output: Contribution to journalJournal article

Published
<mark>Journal publication date</mark>1/07/2020
<mark>Journal</mark>Journal of Futures Markets
Issue number7
Volume40
Number of pages18
Pages (from-to)1072-1089
Publication statusPublished
Early online date27/03/20
Original languageEnglish

Abstract

This paper examines the fractional cointegration between downside (upside) components of realized and implied variances. A positive association is found between the strength of their cofractional relation and the return predictability of their differences. That association is established via the common long-memory component of the variances that are fractionally cointegrated, which represents the volatility-of-volatility factor that determines the variance premium. Our results indicate that market fears play a critical role not only in driving the long-run equilibrium relationship between implied-realized variances but also in understanding the return predictability. A simulation study further verifies these claims.

Bibliographic note

This is the peer reviewed version of the following article: Li, Z, Izzeldin, M, Yao, X. Return predictability of variance differences: A fractionally cointegrated approach. J Futures Markets. 2020; 40: 1072– 1089. https://doi.org/10.1002/fut.22110 which has been published in final form athttps://onlinelibrary.wiley.com/doi/abs/10.1002/fut.22110 This article may be used for non-commercial purposes in accordance With Wiley Terms and Conditions for self-archiving.