TY - JOUR
T1 - Tails, Fears and Risk Premia
AU - Bollerslev, Tim
AU - Todorov, Viktor
PY - 2011
Y1 - 2011
N2 - 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 reveals large time-varying compensation for fears of disasters. Our empirical investigations involve 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.
AB - 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 reveals large time-varying compensation for fears of disasters. Our empirical investigations involve 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.
U2 - 10.1111/j.1540-6261.2011.01695.x
DO - 10.1111/j.1540-6261.2011.01695.x
M3 - Article
VL - 66
SP - 2165
EP - 2211
JO - The Journal of Finance
JF - The Journal of Finance
ER -