Do fear indices help predict stock returns

Ghulame Rubbaniy
Robel Asmerom
Syed Kumail Abbas Rizvi

Document Type

Article

Source of Publication

SSRN Electronic Journal

Publication Date

1-1-2012

Abstract

This study investigates the forecasting power of implied volatility indices on forward looking returns. Prior studies document that negative innovations to returns are associated with increasing implied volatility of the underlying indices; thus, suggesting a possible relationship between extremely high levels of implied volatility and positive short term returns. We investigate this issue by examining the predictive power of three implied volatility indices, VIX, VXN and VDAX, on the underlying index returns. We extend previous research by also focusing on characterised selected stocks and examine the relationship between implied volatility indices and future returns across different sectors and classified portfolios. Our findings suggest that implied volatility indices are good predictors of 20-days and 60-days forward looking returns and illustrate insignificant predictive power for very short term (1-day and 5-days) returns.

ISSN

1556-5068

Publisher

Elsevier BV

Volume

14

First Page

831

Last Page

847

Disciplines

Business | Physical Sciences and Mathematics

Indexed in Scopus

no

Open Access

no

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