Expected Stock Returns and Forward Variance
Journal of Financial Markets, Forthcoming
42 Pages Posted: 26 Jan 2012 Last revised: 14 Jun 2016
Date Written: January 25, 2012
Abstract
Bakshi, Panayotov, and Skoulakis (2011) show that forward variances are predictive of real economic activity and asset returns. In this paper, we study this relation by using CBOE VIX term structure data between January 1992 and August 2009. We find that certain combinations of the 3-, 6-, and 9-month forward variances (single forward variance factor) are predictive of stock market returns at 1-, 3-, and 6-month horizons. Forward variances constructed from seven out of nine sectors are also predictive of market returns and growth in measures of real economic activity. Out-of-sample analysis confirms the prediction power of the single forward variance factor.
Keywords: Stock returns; Forward variance; Predictability
JEL Classification: C5; G12; G13
Suggested Citation: Suggested Citation