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on Risk Management |
| By: | Frédérique Bec (THEMA, Université de Cergy-Pontoise et CREST, Malakoff, France.); Christian Gollier (Toulouse School of Economics (LERNA and IDEI), France.) |
| Abstract: | This paper explores French assets returns predictability within a VAR setup. Using quarterly data from 1970Q4 to 2006Q4, it turns out that bonds, equities and bills returns are actually predictable. This feature implies that the investment horizon does indeed matter in the asset allocation. The VAR parameters estimates are then used to compute real returns conditional volatility across investment horizons. The results reveal the same kind of horizon effect as the one found in recent empirical studies using quarterly U.S. data. More specifically, the annualized standard deviation of French stocks returns goes down from 22% for a 1-year horizon to only 2.8% for a 25-year investment horizon. They suggest that long-horizon investors overstate the share of bonds in their portfolio choice when neglecting the horizon effect on risk of asset returns predictability. |
| Keywords: | Asset return predictability, Investment horizon, Vector Autoregression. |
| JEL: | G11 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2008-10&r=rmg |
| By: | Ralf Becker; Adam Clements; Andrew McClelland |
| Abstract: | Much research has investigated the differences between option implied volatilities and econometric model-based forecasts in terms of forecast accuracy and relative informational content. Implied volatility is a market determined forecast, in contrast to model-based forecasts that employ some degree of smoothing to generate forecasts. Therefore, implied volatility has the potential to reflect information that a model-based forecast could not. Specifically, this paper considers two issues relating to the informational content of the S&P 500 VIX implied volatility index. First, whether it subsumes information on how historical jump activity contributed to the price volatility, followed by whether the VIX reflects any incremental information relative to model based forecasts pertaining to future jumps. It is found that the VIX index both subsumes information relating to past jump contributions to volatility and reflects incremental information pertaining to future jump activity, relative to modelbased forecasts. This is an issue that has not been examined previously in the literature and expands our understanding of how option markets form their volatility forecasts. |
| Keywords: | Implied volatility, VIX, volatility forecasts, informational efficiency, jumps |
| JEL: | C12 C22 G00 G14 |
| Date: | 2008–03–17 |
| URL: | http://d.repec.org/n?u=RePEc:qut:auncer:2008-99&r=rmg |