Inferring volatility dynamics and risk premia from the S&P 500 and VIX markets

Chris Bardgett, Elise Gourier and Markus Leippold

This paper studies the information content of the S&P 500 and VIX markets on the volatility of the S&P 500 returns. We estimate a flexible affine model based on a joint time series of underlying indexes and option prices on both markets. An extensive model specification analysis reveals that jumps and a stochastic level of reversion for the variance help reproduce risk-neutral distributions as well as the term structure of volatility smiles and of variance risk premia. We find that the S&P 500 and VIX derivatives prices are consistent in times of market calm but contain conflicting information on the variance during market distress.

MoreLess

Year of publication:	January 2016
Authors:	Bardgett, Chris ; Gourier, Elise ; Leippold, Markus
Publisher:	London : School of Economics and Finance, Queen Mary University of London
Subject:	S&P 500 and VIX joint modeling \| Volatility dynamics \| Particle filter \| Variance risk premium \| Volatilität \| Volatility \| Risikoprämie \| Risk premium \| Börsenkurs \| Share price \| Zeitreihenanalyse \| Time series analysis \| Schätzung \| Estimation \| Theorie \| Theory \| ARCH-Modell \| ARCH model