Arizona State University
Institutional Affiliation: Arizona State University
NBER Working Papers and Publications
|May 2018||Do Properly Anticipated Prices Fluctuate Randomly? Evidence from VIX Futures Markets|
with George O. Aragon, Rajnish Mehra: w24575
The VIX index is not traded on the spot market. Hence, in contrast to other futures markets, the VIX futures contract and spot index are not linked by a no-arbitrage condition. We examine (a) whether predictability in the VIX index carries over to the futures market, and (b) whether there is independent time series predictability in VIX futures prices. The answer to both questions is no. Samuelson (1965) was right: VIX futures prices properly anticipate predictability in volatility, and are themselves unpredictable.
|February 2016||Is Idiosyncratic Risk Conditionally Priced?|
with Rajnish Mehra, Daruo Xie: w22016
In Merton (1987), idiosyncratic risk is priced in equilibrium as a consequence of incomplete diversification. We modify his model to allow the degree of diversification to vary with average idiosyncratic volatility. This simple recognition results in a state-dependent idiosyncratic risk premium that is higher when average idiosyncratic volatility is low, and vice versa. The data appear to be consistent with a positive state-dependent premium for idiosyncratic risk both in the US and in other developed markets.