Expected Stock Returns and Forward Variance

Journal of Financial Markets, Forthcoming

42 Pages Posted: 26 Jan 2012 Last revised: 14 Jun 2016

See all articles by Xingguo Luo

Xingguo Luo

Zhejiang University, College of Economics and Academy of Financial Research

Jin E. Zhang

University of Otago, Otago Business School, Department of Accountancy and Finance

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

Luo, Xingguo and Zhang, Jin E., Expected Stock Returns and Forward Variance (January 25, 2012). Journal of Financial Markets, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1991577 or http://dx.doi.org/10.2139/ssrn.1991577

Xingguo Luo (Contact Author)

Zhejiang University, College of Economics and Academy of Financial Research ( email )

38 Zheda Road
Hangzhou, Zhejiang 310058
China

HOME PAGE: http://mypage.zju.edu.cn/xingguo

Jin E. Zhang

University of Otago, Otago Business School, Department of Accountancy and Finance ( email )

Dunedin, 9054
New Zealand
64 3 479 8575 (Phone)
64 3 479 8171 (Fax)

HOME PAGE: http://sites.google.com/site/jinzhanghomepage/home

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