Return predictability of variance differences : A fractionally cointegrated approach

Li, Z. and Izzeldin, M. and Yao, X. (2020) Return predictability of variance differences : A fractionally cointegrated approach. Journal of Futures Markets, 40 (7). pp. 1072-1089. ISSN 0270-7314

[thumbnail of Accepted Manuscript]
Text (Accepted Manuscript)
Accepted_Manuscript.pdf - Accepted Version
Available under License Creative Commons Attribution-NonCommercial.

Download (471kB)


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:
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. J Futures Markets. 2020; 40: 1072– 1089. which has been published in final form at This article may be used for non-commercial purposes in accordance With Wiley Terms and Conditions for self-archiving.
Uncontrolled Keywords:
?? fractional cointegrationreturn predictabilityvariance risk premiumfinancebusiness, management and accounting(all)economics and econometricsaccounting ??
ID Code:
Deposited By:
Deposited On:
20 Apr 2020 12:10
Last Modified:
17 Dec 2023 01:47