Risk and return: Long-run relations, fractional cointegration, and return predictability

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dc.citation.firstpage409en_US
dc.citation.issueNumber2en_US
dc.citation.journalTitleJournal of Financial Economicsen_US
dc.citation.lastpage424en_US
dc.citation.volumeNumber108en_US
dc.contributor.authorBollerslev, Timen_US
dc.contributor.authorOsterrieder, Danielaen_US
dc.contributor.authorSizova, Nataliaen_US
dc.contributor.authorTauchen, Georgeen_US
dc.date.accessioned2015-07-10T15:47:02Zen_US
dc.date.available2015-07-10T15:47:02Zen_US
dc.date.issued2013en_US
dc.description.abstractUnivariate dependencies in market volatility, both objective and risk neutral, are best described by long-memory fractionally integrated processes. Meanwhile, the ex post difference, or the variance swap payoff reflecting the reward for bearing volatility risk, displays far less persistent dynamics. Using intraday data for the Standard & Poor's 500 and the volatility index (VIX), coupled with frequency domain methods, we separate the series into various components. We find that the coherence between volatility and the volatility-risk reward is the strongest at long-run frequencies. Our results are consistent with generalized long-run risk models and help explain why classical efforts of establishing a naïve return-volatility relation fail. We also estimate a fractionally cointegrated vector autoregression (CFVAR). The model-implied long-run equilibrium relation between the two variance variables results in nontrivial return predictability over interdaily and monthly horizons, supporting the idea that the cointegrating relation between the two variance measures proxies for the economic uncertainty rewarded by the market.en_US
dc.identifier.citationBollerslev, Tim, Osterrieder, Daniela, Sizova, Natalia, et al.. "Risk and return: Long-run relations, fractional cointegration, and return predictability." <i>Journal of Financial Economics,</i> 108, no. 2 (2013) Elsevier: 409-424. http://dx.doi.org/10.1016/j.jfineco.2013.01.002.en_US
dc.identifier.doihttp://dx.doi.org/10.1016/j.jfineco.2013.01.002en_US
dc.identifier.urihttps://hdl.handle.net/1911/80887en_US
dc.language.isoengen_US
dc.publisherElsevieren_US
dc.rightsThis is an author's peer-reviewed final manuscript, as accepted by the publisher. The published article is copyrighted by Elsevier.en_US
dc.subject.keywordhigh-frequency dataen_US
dc.subject.keywordrealized and options implied volatilitiesen_US
dc.subject.keywordvolatility risk premiumen_US
dc.subject.keywordlong-memory and fractional cointegrationen_US
dc.subject.keywordreturn predictabilityen_US
dc.titleRisk and return: Long-run relations, fractional cointegration, and return predictabilityen_US
dc.typeJournal articleen_US
dc.type.dcmiTexten_US
dc.type.publicationpost-printen_US
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