Expected returns on market volatility, which can be obtained from VIX futures prices in closed form using standard models, positively predict subsequent realized volatility returns. Volatility returns are negative on average. Following increases in volatility, expected volatility returns and subsequent realized volatility returns become more negative. Because realized volatility returns are negatively correlated with index returns, expected volatility returns also negatively predict S&P 500 index returns, but these results are less significant. The results are robust to a wide range of variations in the empirical setup and to small-sample biases.

Predictive regressions of market returns on option-implied moments measured before pre-scheduled FOMC meetings show that tail risks play an important role in understanding the market risk premium around FOMC announcement days. Skewness and kurtosis, which capture investors’ expectations of the tails of the return distribution, robustly predict post-FOMC returns both in-sample and out-of-sample. The predictability lasts up to 1 week and is stronger for expansionary monetary policy shocks. The signs of the corresponding risk premiums are consistent with economic intuition, illustrating the role of periods with high risk premiums to confirm theoretical predictions.