Tails, Fears and Risk Premia

Tim Bollerslev and Viktor Todorov

No 10-33, Working Papers from Duke University, Department of Economics

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 suggests both large and time-varying compensations for fears of disasters. Our empirical investigations are essentially model-free, involving 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.

Keywords: rare events; jumps; high-frequency data; options; fears; extreme value (search for similar items in EconPapers)
JEL-codes: C13 C14 G10 G12 (search for similar items in EconPapers)
Pages: 47
Date: 2010
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Related works:
Journal Article: Tails, Fears, and Risk Premia (2011)
Working Paper: Tails, Fears and Risk Premia (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:duk:dukeec:10-33

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