Looking for Risk: Volatility Bounds in Macro

Emile A. Marin and JiYong Jung

No 378, Working Papers from University of California, Davis, Department of Economics

Abstract: We characterize the gap between the equity risk premium (ERP) and its SVIX-implied lower bound as an equilibrium object, increasing in the correlation of valuations and returns, their relative volatility, and risk aversion. Higher risk premia need not be reflected in options-implied volatility. Yet, models resolving the equity premium puzzle through high risk aversion will tend to understate the lower bound and risk-neutral variance of returns. Applying our findings to a RBC economy with disasters, we consider an increase in their probability leading to a 1 p.p. rise in the ERP, but a negligible rise in the SVIX-implied bound (10 b.p.).

Date: 2026-03-19
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