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Tails, Fears, and Risk Premia

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Listed author(s):
  • 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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File URL: http://hdl.handle.net/10.1111/j.1540-6261.2011.01695.x
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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 66 (2011)
Issue (Month): 6 (December)
Pages: 2165-2211

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Handle: RePEc:bla:jfinan:v:66:y:2011:i:6:p:2165-2211
DOI: j.1540-6261.2011.01695.x
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Find related papers by JEL classification:
  • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
  • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
  • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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