Industry variance risk premium, cross-industry correlation, and expected returns
Research output: Journal Publications and Reviews (RGC: 21, 22, 62) › 21_Publication in refereed journal › peer-review
Author(s)
Related Research Unit(s)
Detail(s)
| Original language | English |
|---|---|
| Pages (from-to) | 3-32 |
| Journal / Publication | Journal of Futures Markets |
| Volume | 43 |
| Issue number | 1 |
| Online published | 9 Sep 2022 |
| Publication status | Published - Jan 2023 |
Link(s)
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.
Research Area(s)
- industry portfolio, option-implied correlation, return predictability, sector return, variance risk premium
Citation Format(s)
Industry variance risk premium, cross-industry correlation, and expected returns. / Zhu, Yabei; Luo, Xingguo; Xu, Qi.
In: Journal of Futures Markets, Vol. 43, No. 1, 01.2023, p. 3-32.Research output: Journal Publications and Reviews (RGC: 21, 22, 62) › 21_Publication in refereed journal › peer-review
