Return Predictability of Variance Differences:a fractionally co-integrated approach

Li, Zhenxiong and Izzeldin, Marwan and Yao, Xingzhi (2020) Return Predictability of Variance Differences:a fractionally co-integrated approach. The Journal of Futures Markets, 40 (7). pp. 1072-1089.

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Abstract

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.

Item Type:
Journal Article
Journal or Publication Title:
The Journal of Futures Markets
Additional Information:
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.
ID Code:
141690
Deposited By:
Deposited On:
20 Feb 2020 11:30
Refereed?:
Yes
Published?:
Published
Last Modified:
27 Sep 2020 05:43