IMPLIED VOLATILITY AND THE RISK-RETURN RELATION: A NOTE
Article first published online: 28 MAR 2012
Copyright © 2012 John Wiley & Sons, Ltd.
International Journal of Finance & Economics
Volume 18, Issue 2, pages 159–164, March 2013
How to Cite
Kanas, A. (2013), IMPLIED VOLATILITY AND THE RISK-RETURN RELATION: A NOTE. Int. J. Fin. Econ., 18: 159–164. doi: 10.1002/ijfe.449
- Issue published online: 18 APR 2013
- Article first published online: 28 MAR 2012
- Manuscript Accepted: 18 APR 2011
- Manuscript Received: 28 SEP 2010
- S&P 500;
- implied volatility index;
- risk-return relation
A strong and positive risk-return relation for the S&P 500 market index is uncovered when the implied volatility index is allowed for in the conditional variance equation. This result holds for five alternative Generalised Autoregressive Heteroscedasticity (GARCH) specifications and irrespective of the conditional distribution. Monte Carlo evidence suggests that if implied volatility is not included while it should be, then the risk-return relation is more likely to be negative or weak. Copyright © 2012 John Wiley & Sons, Ltd.