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.
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Final published version
Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
}
TY - JOUR
T1 - Return predictability of variance differences
T2 - A fractionally cointegrated approach
AU - Li, Z.
AU - Izzeldin, M.
AU - Yao, X.
N1 - 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.
PY - 2020/7/1
Y1 - 2020/7/1
N2 - 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.
AB - 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.
KW - fractional cointegration
KW - return predictability
KW - variance risk premium
U2 - 10.1002/fut.22110
DO - 10.1002/fut.22110
M3 - Journal article
VL - 40
SP - 1072
EP - 1089
JO - Journal of Futures Markets
JF - Journal of Futures Markets
SN - 0270-7314
IS - 7
ER -