Dynamic estimation of volatility risk premia and investor risk aversion from option-implied and realized volatilities

Published

Journal Article

This paper proposes a method for constructing a volatility risk premium, or investor risk aversion, index. The method is intuitive and simple to implement, relying on the sample moments of the recently popularized model-free realized and option-implied volatility measures. A small-scale Monte Carlo experiment confirms that the procedure works well in practice. Implementing the procedure with actual S&P500 option-implied volatilities and high-frequency five-minute-based realized volatilities indicates significant temporal dependencies in the estimated stochastic volatility risk premium, which we in turn relate to a set of macro-finance state variables. We also find that the extracted volatility risk premium helps predict future stock market returns. © 2010 Elsevier B.V. All rights reserved.

Full Text

Duke Authors

Cited Authors

  • Bollerslev, T; Gibson, M; Zhou, H

Published Date

  • January 1, 2011

Published In

Volume / Issue

  • 160 / 1

Start / End Page

  • 235 - 245

International Standard Serial Number (ISSN)

  • 0304-4076

Digital Object Identifier (DOI)

  • 10.1016/j.jeconom.2010.03.033

Citation Source

  • Scopus