The calm after the storm: Implied volatility and future stock index returns
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This article explores the predictive power of five implied volatility indices for subsequent returns on the corresponding underlying stock indices from January 2000 through October 2013. Contrary to previous research, very low volatility levels appear to be followed by significantly positive average returns over the next 20, 40 or 60 trading days. Rolling trading simulations show that positive adjusted excess returns can be achieved when long positions in the stock indices are taken on days of very low implied volatility. This may be a hint that market inefficiencies exist in some markets, especially outside the USA. The excess returns measured against a buy and hold benchmark are significant for the German and Japanese market when tested with a bootstrap methodology. The results are robust against a broad spectrum of specifications.
The European Journal of Finance
Copyright 2014 Taylor & Francis (Routledge). This is an Accepted Manuscript of an article published by Taylor & Francis in The European Journal of Finance on 21 Jul 2014, available online: http://www.tandfonline.com/doi/full/10.1080/1351847X.2014.935872