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Volatility
- Thread starter duard
- Start date
Implied Volatility and Future Portfolio Returns
PRITHVIRAJ BANERJEE
Florida State University - Department of Finance
JAMES S. DORAN
Florida State University - Department of Finance
DAVID R. PETERSON
Florida State University - Department of Finance April 12, 2006
Abstract:
Prior studies find that the CBOE Volatility Index (VIX) predicts returns on broad stock market indices. This is an important finding because it suggests implied volatilities measured by VIX are a risk factor affecting security returns or an indicator of market inefficiency. We extend prior work in three important ways. First, we examine portfolios sorted on book-to-market equity, size, and beta to see if VIXâs predictive ability is pervasive across different portfolios. Second, we include deviations of VIX from recent means in addition to VIX levels. Third, we control for the four Fama and French (1993) and Carhart (1997) factors MKT, SMB, HML, and UMD. We find that VIX-related variables have strong predictive ability, suggesting an important role for VIX in security returns.
PRITHVIRAJ BANERJEE
Florida State University - Department of Finance
JAMES S. DORAN
Florida State University - Department of Finance
DAVID R. PETERSON
Florida State University - Department of Finance April 12, 2006
Abstract:
Prior studies find that the CBOE Volatility Index (VIX) predicts returns on broad stock market indices. This is an important finding because it suggests implied volatilities measured by VIX are a risk factor affecting security returns or an indicator of market inefficiency. We extend prior work in three important ways. First, we examine portfolios sorted on book-to-market equity, size, and beta to see if VIXâs predictive ability is pervasive across different portfolios. Second, we include deviations of VIX from recent means in addition to VIX levels. Third, we control for the four Fama and French (1993) and Carhart (1997) factors MKT, SMB, HML, and UMD. We find that VIX-related variables have strong predictive ability, suggesting an important role for VIX in security returns.
Quote from duard:
Classic rolling sell-off. Sellers started early but on light volume and as each level was met new sellers entered with the end result of a trend day down.
Volume still light to moderate though which would indicate their are more sellers that haven't bought into the possibility of a top in place.
Today would be best described as the takedown turnaround. Gap low, cover and/or reverse at the big support number.
Vix showed it quite clearly.....
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Quote from duard:
Volatility has expanded recently with an increase in the average true range for daily, hourly, 5 minute, and 1 minute timeframes in the stock index futures.
Does anybody think this represents the beginning of a new phase of market development? That is from 1998 - 2000 bull phase with good volatility. 2000- 2002 Bear market with big volatility. 2003 - present reduced volatility with a bull market. Is this a change at present or are we just putting in another shortterm bottom which has over the last few years been associated with a brief (2 - 3 week) increase in ranges and volatility?
Thoughts anyone?
Not likely. Volatility and trendiness are both below historical averages...making the ES/SP less tradeable.
T = Trendiness
V = Volatility
Numbers across top = number of days examined.