TY - JOUR AU - Bekaert, Geert AU - Hoerova, Marie TI - The VIX, the Variance Premium and Stock Market Volatility JF - National Bureau of Economic Research Working Paper Series VL - No. 18995 PY - 2013 Y2 - April 2013 DO - 10.3386/w18995 UR - http://www.nber.org/papers/w18995 L1 - http://www.nber.org/papers/w18995.pdf N1 - Author contact info: Geert Bekaert Graduate School of Business Columbia University 3022 Broadway, 411 Uris Hall New York, NY 10027 Tel: 212/854-9156 Fax: 212/662-8474 E-Mail: gb241@columbia.edu Marie Hoerova European Central Bank Sonnemannstrasse 20 D-60314 Frankfurt am Main Germany E-Mail: marie.hoerova@ecb.int AB - We decompose the squared VIX index, derived from US S&P500 options prices, into the conditional variance of stock returns and the equity variance premium. The latter is increasing in risk aversion in a wide variety of economic settings. We tackle several measurement issues assessing a plethora of state-of-the-art volatility forecasting models. We then examine the predictive power of the VIX and its two components for stock market returns and economic activity. The variance premium predicts stock returns but the conditional stock market variance predicts economic activity, and is more contemporaneously correlated with financial instability than is the variance premium. ER -