Do fear indices help predict stock returns?
Document Type
Article
Source of Publication
Quantitative Finance
Publication Date
1-1-2014
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. © 2014 © 2014 Taylor & Francis.
DOI Link
ISSN
Publisher
Routledge
Volume
14
Issue
5
First Page
831
Last Page
847
Disciplines
Business
Keywords
Financial crises, Forward looking returns, Implied volatility, Realised volatility
Scopus ID
Recommended Citation
Rubbaniy, G.; Asmerom, Robel; Rizvi, Syed Kumail Abbas; and Naqvi, Bushra, "Do fear indices help predict stock returns?" (2014). All Works. 1302.
https://zuscholars.zu.ac.ae/works/1302
Indexed in Scopus
yes
Open Access
no