Variance Risk Premium and VIX Pricing: A Simple GARCH Approach

Abstract

This paper assesses variance risk premium and forecasts out-of-sample VIX under GARCH(1,1), GJR, and Heston-Nandi models. With the date-t GARCH parameters estimated in a moving window fashion from 3,500 daily returns of the SP these risk-neutral parameters forecast the date-t VIX accurately with errors of not more than 0.2% on average.