Industry variance risk premium, cross-industry correlation, and expected returns

Yabei Zhu; Xingguo Luo; Qi Xu

doi:10.1002/fut.22376

Industry variance risk premium, cross-industry correlation, and expected returns

Yabei Zhu, Xingguo Luo, Qi Xu^*

^*Corresponding author for this work

College of Business

Research output: Journal Publications and Reviews › RGC 21 - Publication in refereed journal › peer-review

1 Citation (Scopus)

Abstract

We investigate the variance risk premium (VRP) and implied correlation (IC) at the industry level. Using the index and sector exchange-traded fund options, we construct-sector VRPs and cross-sector IC measures. Sector VRPs predict sector returns, and adding the average sector VRP with IC improves predictability. Combining the average sector VRP and IC outperforms the market VRP in predicting market returns both in-sample and out-of-sample and generates sizeable economic values. We document a strong spillover effect from sector VRPs to the market VRP. The average sector VRP and cross-sector IC contain information beyond the market VRP and cross-stock IC.

Original language	English
Pages (from-to)	3-32
Journal	Journal of Futures Markets
Volume	43
Issue number	1
Online published	9 Sept 2022
DOIs	https://doi.org/10.1002/fut.22376
Publication status	Published - Jan 2023

Research Keywords

industry portfolio
option-implied correlation
return predictability
sector return
variance risk premium

Access Output

10.1002/fut.22376

Other Access Options

Check CityUHK Library

Permanent Link

Right click to copy link

Cite this

@article{d8f48fcf6a2146bb9dba217ba7d0380e,

title = "Industry variance risk premium, cross-industry correlation, and expected returns",

abstract = "We investigate the variance risk premium (VRP) and implied correlation (IC) at the industry level. Using the index and sector exchange-traded fund options, we construct-sector VRPs and cross-sector IC measures. Sector VRPs predict sector returns, and adding the average sector VRP with IC improves predictability. Combining the average sector VRP and IC outperforms the market VRP in predicting market returns both in-sample and out-of-sample and generates sizeable economic values. We document a strong spillover effect from sector VRPs to the market VRP. The average sector VRP and cross-sector IC contain information beyond the market VRP and cross-stock IC.",

keywords = "industry portfolio, option-implied correlation, return predictability, sector return, variance risk premium",

author = "Yabei Zhu and Xingguo Luo and Qi Xu",

year = "2023",

month = jan,

doi = "10.1002/fut.22376",

language = "English",

volume = "43",

pages = "3--32",

journal = "Journal of Futures Markets",

issn = "0270-7314",

publisher = "Wiley-Liss Inc.",

number = "1",

}

TY - JOUR

T1 - Industry variance risk premium, cross-industry correlation, and expected returns

AU - Zhu, Yabei

AU - Luo, Xingguo

AU - Xu, Qi

PY - 2023/1

Y1 - 2023/1

N2 - We investigate the variance risk premium (VRP) and implied correlation (IC) at the industry level. Using the index and sector exchange-traded fund options, we construct-sector VRPs and cross-sector IC measures. Sector VRPs predict sector returns, and adding the average sector VRP with IC improves predictability. Combining the average sector VRP and IC outperforms the market VRP in predicting market returns both in-sample and out-of-sample and generates sizeable economic values. We document a strong spillover effect from sector VRPs to the market VRP. The average sector VRP and cross-sector IC contain information beyond the market VRP and cross-stock IC.

AB - We investigate the variance risk premium (VRP) and implied correlation (IC) at the industry level. Using the index and sector exchange-traded fund options, we construct-sector VRPs and cross-sector IC measures. Sector VRPs predict sector returns, and adding the average sector VRP with IC improves predictability. Combining the average sector VRP and IC outperforms the market VRP in predicting market returns both in-sample and out-of-sample and generates sizeable economic values. We document a strong spillover effect from sector VRPs to the market VRP. The average sector VRP and cross-sector IC contain information beyond the market VRP and cross-stock IC.

KW - industry portfolio

KW - option-implied correlation

KW - return predictability

KW - sector return

KW - variance risk premium

UR - http://www.scopus.com/inward/record.url?scp=85137441917&partnerID=8YFLogxK

UR - https://www.scopus.com/record/pubmetrics.uri?eid=2-s2.0-85137441917&origin=recordpage

U2 - 10.1002/fut.22376

DO - 10.1002/fut.22376

M3 - RGC 21 - Publication in refereed journal

SN - 0270-7314

VL - 43

SP - 3

EP - 32

JO - Journal of Futures Markets

JF - Journal of Futures Markets

IS - 1

ER -

Industry variance risk premium, cross-industry correlation, and expected returns

Abstract

Research Keywords

Access Output

Other Access Options

Permanent Link

Other Files and Links

Fingerprint

Cite this