Tail Risk Premia and Return Predictability

Tim Bollerslev, Viktor Todorov () and Lai Xu ()
Additional contact information
Viktor Todorov: Northwestern University and CREATES, Postal: Department of Finance, Kellogg School of Management, 2001 Sheridan Road, Evanston, IL 60208, USA
Lai Xu: Duke University, Postal: Department of Economics, Durham NC 27708, USA

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

Abstract: The variance risk premium, defined as the difference between actual and risk-neutralized expectations of the forward aggregate market variation, helps predict future market returns. Relying on new essentially model-free estimation procedure, we show that much of this predictability may be attributed to time variation in the shape of the tails and compensation demanded by investors for bearing jump tail risk. Our results are consistent with the idea that the temporal variation in the separate diffusive and jump risk components of the variance risk premium may be associated with notions of time-varying economic uncertainty and changes in risk aversion, or market fears, respectively.

Keywords: Variance risk premium; time-varying jump tails; market sentiment and fears; return predictability. (search for similar items in EconPapers)
JEL-codes: C13 C14 G10 G12 (search for similar items in EconPapers)
Pages: 49
Date: 2014-09-29
New Economics Papers: this item is included in nep-rmg and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Tail risk premia and return predictability (2015)
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