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Looking for Risk: Volatility Bounds in Macro

Author

Listed:
  • Emile A. Marin
  • JiYong Jung

    (Department of Economics, University of California Davis)

Abstract

We characterize the gap between the equity risk premium (ERP) and its SVIX-implied lower bound as an equilibrium object, increasing in the correlation of valuations and returns, their relative volatility, and risk aversion. Higher risk premia need not be reflected in options-implied volatility. Yet, models resolving the equity premium puzzle through high risk aversion will tend to understate the lower bound and risk-neutral variance of returns. Applying our findings to a RBC economy with disasters, we consider an increase in their probability leading to a 1 p.p. rise in the ERP, but a negligible rise in the SVIX-implied bound (10 b.p.).

Suggested Citation

  • Emile A. Marin & JiYong Jung, 2026. "Looking for Risk: Volatility Bounds in Macro," Working Papers 378, University of California, Davis, Department of Economics.
    • Handle: RePEc:cda:wpaper:378
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    File URL: https://repec.dss.ucdavis.edu/files/kyl1jmn4th7ra7xs0lf422v4t112/Looking_for_Risk_final.pdf
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