Volatility Risk Premium: Comparing Implied and Realized Volatility
Summary
The indicator defines the volatility risk premium (VRP) as the difference between the VIX and realized volatility estimated from SPY prices. It offers close-to-close, Parkinson, and Garman–Klass realized-volatility methods, annualizes those estimates, and smooths the resulting difference with an exponential moving average. A statistical lookback supplies a mean, standard deviation, z-score, and percentile for context.
Additional displays classify VRP into configurable regimes, compare short- and long-window realized volatility, and flag extreme readings or mean-reversion conditions. The script describes positive VRP as investors paying for volatility protection and negative VRP as realized volatility exceeding implied volatility; it cites academic work associating the premium with future equity returns and market stress. Those claims are background rationale, not results demonstrated by this indicator. It uses VIX and SPY data regardless of the chart in many cases, and the chosen windows and thresholds are configurable. Signals and regime labels are indicators for interpretation, not evidence of predictive performance or a tested trading strategy.
Key ideas
- VRP is calculated as VIX minus an estimate of realized volatility from SPY prices.
- Realized volatility can be estimated with close-to-close, Parkinson, or Garman–Klass methods.
- A smoothed VRP series is contextualized using a rolling mean, standard deviation, z-score, and percentile.
- The indicator labels VRP regimes and compares short- and long-term realized volatility as a term-structure measure.
- Mean-reversion signals and regime alerts are configurable indicators, and the script supplies no strategy test results.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.