“This paper proposes a novel and simple approach to test affine option pricing models. Surprising simple, in a large class of affine jump diffusion models
the forward integrated variance depends only and linearly on the spot variance. An implication that forms the ground of my test. I find that in the sample there exists a quasi linear relation between the VIX and the spot variance. The perfection of a linear relation is ruined by volatility jumps and volatility persistence. Volatility jumps are taken by the market not as permanent shocks and only part of the volatility increase is absorbed into the expectation of
future volatility path. And the volatility persistence has only modest effect on the VIX. The regression residuals are found to contain relevant information on the skewness
of implied volatility, especially during financial crisis. Predictability of market return by those residuals is uncovered, with a 4% R square at monthly horizon.”