EconPapers    
Economics at your fingertips  
 

The Pricing of Tail Risk and the Equity Premium: Evidence From International Option Markets

Torben Andersen (), Nicola Fusari and Viktor Todorov

Journal of Business & Economic Statistics, 2020, vol. 38, issue 3, 662-678

Abstract: We explore the pricing of tail risk as manifest in index options across international equity markets. The risk premium associated with negative tail events displays persistent shifts, unrelated to volatility. This tail risk premium is a potent predictor of future returns for all the indices, while the option-implied volatility only forecasts the future return variation. Hence, compensation for negative jump risk is the primary driver of the equity premium, whereas the reward for pure diffusive variance risk is unrelated to future equity returns. We also document pronounced commonalities, suggesting a high degree of integration among the major global equity markets. KEY WORDS: Equity risk premium; International option markets; Predictability; Tail risk; Variance risk premium.

Date: 2020
References: Add references at CitEc
Citations: View citations in EconPapers (8) Track citations by RSS feed

Downloads: (external link)
http://hdl.handle.net/10.1080/07350015.2018.1564318 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: The Pricing of Tail Risk and the Equity Premium: Evidence from International Option Markets (2018) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:jnlbes:v:38:y:2020:i:3:p:662-678

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/UBES20

DOI: 10.1080/07350015.2018.1564318

Access Statistics for this article

Journal of Business & Economic Statistics is currently edited by Eric Sampson, Rong Chen and Shakeeb Khan

More articles in Journal of Business & Economic Statistics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().

 
Page updated 2022-08-16
Handle: RePEc:taf:jnlbes:v:38:y:2020:i:3:p:662-678