Research Details

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 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.

Type

Article

Author(s)

Tim Bollerslev, Viktor Todorov

Date Published

2011

Citations

Bollerslev, Tim, and Viktor Todorov. 2011. Tails, Fears and Risk Premia. Journal of Finance.(6): 2165-2211.