Tails, Fears and Risk Premia

Tim Bollerslev, Viktor Todorov

Research output: Contribution to journalArticlepeer-review

287 Scopus citations


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.
Original languageEnglish
Pages (from-to)2165-2211
JournalThe Journal of Finance
StatePublished - 2011


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