Tails, Fears, and Risk Premia

  • Author(s): TIM BOLLERSLEV, VIKTOR TODOROV
  • Published: Nov 14, 2011
  • Pages: 2165-2211
  • DOI: 10.1111/j.1540-6261.2011.01695.x

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 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.

Jump to menu

Main Navigation

Search the Site / Journal

Search Keywords

Search Tips

Members' Login

Credentials

Members' Options

Site Footer

View Mobile Version