Working Paper: CEPR ID: DP10236
Authors: Elena Andreou; Eric Ghysels
Abstract: This paper presents an innovative approach to extracting factors which are shown to predict the VIX, the S&P 500 Realized Volatility and the Variance Risk Premium. The approach is innovative along two different dimensions, namely: (1) we extract factors from panels of filtered volatilities - in particular large panels of univariate financial asset ARCH-type models and (2) we price equity volatility risk using factors which go beyond the equity class. These are volatility factors extracted from panels of volatilities of short-term funding and long-run corporate spreads as well as volatilities of energy and metals commodities returns and sport/future spreads.
Keywords: ARCH; Filters; Factor Asset Pricing Models
JEL Codes: C2; C5; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| short-run funding spreads volatility factor (G19) | VIX (C58) |
| energy and metals commodities returns volatility factor (Q02) | VIX (C58) |
| short-run funding spreads volatility factor (G19) | S&P 500 realized volatility (G17) |
| energy and metals commodities returns volatility factor (Q02) | S&P 500 realized volatility (G17) |
| short-run funding spreads volatility factor (G19) | variance risk premium (D81) |
| energy and metals commodities returns volatility factor (Q02) | variance risk premium (D81) |
| volatility factors (C58) | excess equity returns (G12) |