Stock Market Return Forecast by Applying Variance Risk Premium
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Abstract
This study focused on ability to forecast the return of SET50 index by using variance risk premium. The data used in this study was monthly data from October 2012 to August 2015, which came up to totally 35 months. Variance risk premium was calculated from the difference between implied volatility and realized volatility. It, therefore, revealed a level of risk aversion of investors towards price risk of underlying assets in the future.
The results for ability to predict return of SET50 index by variance risk premium showed that variance risk premium could predict average return of 1, 9, 11 and 12 months. Moreover when comparing prediction ability for the return of SET index by price/earnings ratio and dividend yield to prediction ability by variance risk premium, the study found that level of ability to predict was higher when using both price/earnings ratio and dividend yield. Finally, the ability to predict return of SET index by variance risk premium with dividend yield had higher ability than using single factor. The model with variance risk premium and dividend yield could best predict the average return of 10 months.
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References
Bollerslev, T., Tauchen, G. and Zhou, H. (2009). Expected Stock Return and Variance Risk Premia. The Review of Financial Studies, 22, 4463-4489.
Bollerslev, T. Marrone, J., Xu, L. and Zhou, H. (2013). Stock Return Predictability and Variance Risk Pemia: Statistical Inference and International Evidence. Journal of Financial and Quantitative Analysis, 49, 633-661.
Cheng, J. (2015). Volatility Forecasting and Volatility Risk Premium. Journal of Applied Mathematics and Physics, 3, 98-102.