Tails, Fears, and Risk Premia

Published

Journal Article

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 compensation 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. © 2011 the American Finance Association.

Full Text

Duke Authors

Cited Authors

  • Bollerslev, T; Todorov, V

Published Date

  • December 1, 2011

Published In

Volume / Issue

  • 66 / 6

Start / End Page

  • 2165 - 2211

Electronic International Standard Serial Number (EISSN)

  • 1540-6261

International Standard Serial Number (ISSN)

  • 0022-1082

Digital Object Identifier (DOI)

  • 10.1111/j.1540-6261.2011.01695.x

Citation Source

  • Scopus