We decompose the squared VIX index, derived from US S&P500 options prices, into the conditional vari-ance ofstock returns and the equity variance premium. We evaluate a plethora ofstate-of-the-art volatil-ity forecasting models to produce an accurate measure ofthe conditional variance. We then examine the predictive powerofthe VIXand its two components forstock market returns, economic activityand finan-cial instability. The variance premium predicts stock returns while the conditional stock market variance predicts economic activity and has a relatively higher predictive power for financial instability than does the variance premium.