Tail risk premia and return predictability

Tim Bollerslev, Viktor Todorov and Lai Xu

Journal of Financial Economics, 2015, vol. 118, issue 1, 113-134

Abstract: The variance risk premium, defined as the difference between the actual and risk-neutral expectations of the forward aggregate market variation, helps predict future market returns. Relying on a new essentially model-free estimation procedure, we show that much of this predictability may be attributed to time variation in the part of the variance risk premium associated with the special compensation demanded by investors for bearing jump tail risk, consistent with the idea that market fears play an important role in understanding the return predictability.

Date: 2015
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Citations: View citations in EconPapers (124)

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Working Paper: Tail Risk Premia and Return Predictability (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:118:y:2015:i:1:p:113-134

DOI: 10.1016/j.jfineco.2015.02.010

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