Tails, Fears and Risk Premia

Tim Bollerslev and Viktor Todorov ()
Additional contact information
Viktor Todorov: Department of Finance, Kellogg School of Management, Northwestern University, Postal: Department of Finance, Kellogg School of Management, Northwestern University, Evanston, IL 60208

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: We show that the compensation for rare events accounts for a large fraction of the equity and variance risk premia in the S&P 500 market index. The probability of rare events vary significantly over time, increasing in periods of high market volatility, but the risk premium for tail events cannot solely be explained by the level of the volatility. Our empirical investigations are essentially model-free. We estimate the expected values of the tails under the statistical probability measure from "medium" size jumps in high-frequency intraday prices and an extreme value theory approximation for the corresponding jump tail density. Our estimates for the risk-neutral expectations are based on short maturity out-of-the money options and new model-free option implied variation measures explicitly designed to separate the tail probabilities. At a general level, our results suggest that any satisfactory equilibrium based asset pricing model must be able to generate large and time-varying compensations for fears of disasters.

Keywords: rare events; jumps; high-frequency data; options; fears; extreme value theory; equity risk premium; variance risk premium (search for similar items in EconPapers)
JEL-codes: C13 C14 G10 G12 (search for similar items in EconPapers)
Pages: 44
Date: 2009-06-11
New Economics Papers: this item is included in nep-mst and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://repec.econ.au.dk/repec/creates/rp/09/rp09_26.pdf (application/pdf)

Related works:
Journal Article: Tails, Fears, and Risk Premia (2011)
Working Paper: Tails, Fears and Risk Premia (2010)
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:aah:create:2009-26

Access Statistics for this paper

More papers in CREATES Research Papers from Department of Economics and Business Economics, Aarhus University
Bibliographic data for series maintained by ().