Peter Reinhard Hansen, Zhuo Huang, Chen Tong, Tianyi Wang
arXiv 10 Dec 2021 · Econometrics · publishedJournal of Financial Econometrics (2022) · 26 citations (OpenAlex)
arXiv:2112.05302 · PDF · DOI · OpenAlex · Extracted main text
We show that the Realized GARCH model yields close-form expression for both the Volatility Index (VIX) and the volatility risk premium (VRP). The Realized GARCH model is driven by two shocks, a return shock and a volatility shock, and these are natural state variables in the stochastic discount factor (SDF). The volatility shock endows the exponentially affine SDF with a compensation for volatility risk. This leads to dissimilar dynamic properties under the physical and risk-neutral measures that can explain time-variation in the VRP. In an empirical application with the S&P 500 returns, the VIX, and the VRP, we find that the Realized GARCH model significantly outperforms conventional GARCH models.
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The works this paper leans on most, across its whole bibliography — not restricted to papers in our corpus. Ranked by composite intensity, which combines how often a work is mentioned, how many sections mention it, and how much of that falls in the main text rather than the appendix.
| Reference | Intensity | Mentions | Sections | Main text | |
|---|---|---|---|---|---|
| 1 | Hao, J. and J. E. Zhang (2013) GARCH option pricing models, the CBOE VIX, and variance risk premium | 1.000 | 13 | 4 | 100% |
| 2 | Christoffersen, P., S. L. Heston, and K. Jacobs (2013) Capturing Option Anomalies with a Variance-Dependent Pricing Kernel | 1.000 | 9 | 4 | 100% |
| 3 | Bollerslev, T., G. Tauchen, and H. Zhou (2009) Expected Stock Returns and Variance Risk Premia | 1.000 | 7 | 3 | 100% |
| 4 | Nelson, D. B (1991) Conditional Heteroskedasticity in Asset Returns: A New Approach | 0.843 | 3 | 3 | 100% |
| 5 | Duan, J.-C (1995) The GARCH option pricing model | 0.811 | 4 | 2 | 100% |
| 6 | Bekaert, G. and M. Hoerova (2014) The VIX, the Variance Premium and Stock Market Volatility | 0.737 | 3 | 3 | 67% |
| 7 | Christoffersen, P., B. Feunou, K. Jacobs, and N. Meddahi (2014) The Economic Value of Realized Volatility: Using High-Frequency Returns for Option Valuation | 0.737 | 3 | 2 | 100% |
| 8 | Bakshi, G. and D. Madan (2006) A Theory of Volatility Spreads | 0.644 | 2 | 2 | 100% |
| 9 | Bates, D. S (1996) Jumps and Stochastic Volatility: Exchange Rate Processes Implicit in Deutsche Mark Options | 0.644 | 2 | 2 | 100% |
| 10 | Carr, P. and L. Wu (2009) Variance Risk Premiums | 0.644 | 2 | 2 | 100% |
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