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. Journal of Futures Markets 2020; 40: 1072– 1089. https://doi.org/10.1002/fut.22110 which has been published in final form at https://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 co-integrated approach
AU - Li, Zhenxiong
AU - Izzeldin, Marwan
AU - Yao, Xingzhi
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. Journal of Futures Markets 2020; 40: 1072– 1089. https://doi.org/10.1002/fut.22110 which has been published in final form at https://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.
U2 - 10.1002/fut.22110
DO - 10.1002/fut.22110
M3 - Journal article
VL - 40
SP - 1072
EP - 1089
JO - The Journal of Futures Markets
JF - The Journal of Futures Markets
IS - 7
ER -