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

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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:
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. https://doi.org/10.1002/fut.22110 which has been published in final form athttps://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.
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/1400/1402
Subjects:
ID Code:
143086
Deposited By:
Deposited On:
20 Apr 2020 12:10
Refereed?:
Yes
Published?:
Published
Last Modified:
06 Jul 2020 01:26