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Tails, Fears and Risk Premia

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  • Tim Bollerslev
  • Viktor Todorov

Abstract

We show that the compensation for rare events accounts for a large fraction of the average equity and variance risk premia. Exploiting the special structure of the jump tails and the pricing thereof we identify and estimate a new Investor Fears index. The index suggests both large and time-varying compensations for fears of disasters. Our empirical investigations are essentially model-free, involving new extreme value theory approximations and high-frequency intraday data for estimating the expected jump tails under the statistical probability measure, and short maturity out-of-the money options and new model-free implied variation measures for estimating the corresponding risk neutral expectations.

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Bibliographic Info

Paper provided by Duke University, Department of Economics in its series Working Papers with number 10-33.

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Length: 47
Date of creation: 2010
Date of revision:
Handle: RePEc:duk:dukeec:10-33

Contact details of provider:
Postal: Department of Economics Duke University 213 Social Sciences Building Box 90097 Durham, NC 27708-0097
Phone: (919) 660-1800
Fax: (919) 684-8974
Web page: http://econ.duke.edu/

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Keywords: rare events; jumps; high-frequency data; options; fears; extreme value;

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References

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