15
Jan
Why Is Volatility Term Structure Upward Sloping. Heres the VIX index nearly doubling in a three. We show that the term structure of equity risk premia in the strip data is conditionally upward sloping in expansions downward sloping in recessions and unconditionally upward sloping. Since volatility is a measure of systematic risk the. Historically this premium to spot has been too high relative to the subsequent realized volatility and thus traders have.
We emphasize that the shape of the model-implied term structures depends mainly on the preference parameters and the sign of the correlation between shocks to contemporaneous output growth and shocks to expected output growth. The term structure of VIX how the price of future contracts relates to the spot is normally in contango upward sloping meaning that VIX futures have a higher price than the spot. Since volatility is a measure of systematic risk the. It suggests the markets expectation on the future volatility. If the VIX is upward-sloping it implies that investors expect to see the. The former occurs because the con- sumptions speed of recovery is not high enough to outweigh time-varying risk of disasters and 2Consistent with the international evidence documented byGourio2008 our calibration implies that dividends recover.
Yes eventually at the end of the bullish market phase the term structure will be predicting an increase in volatility but what about all the other days during the bull market when it was in the same state but the market just kept going higher.
The term structure of the VIX index is the VIX plotted on different expirations. If the VIX is upward-sloping it implies that investors expect to see the. Yield curves are usually upward sloping asymptotically. The unconditional upward slope is strengthened when the frequency of recession periods in the data isadjustedtomatchthehistoricaloccurrenceofrecessions. The term structure of bond yields also called the term structure of interest rates is typically upward sloping. When this correlation is negative a negative consumption.