Tails, Fears and Risk Premia
Bollerslev, Tim and
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 reveals large time-varying compensations for fears of disasters. Our empirical investigations involve 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.
Bollerslev, Tim and. 2011. Tails, Fears and Risk Premia. Journal of Finance . 66(6): 2165-2211.