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

Publication ,  Journal Article
Bollerslev, T; Gibson, M; Zhou, H
Published in: Journal of Econometrics
January 1, 2011

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.

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Published In

Journal of Econometrics

DOI

ISSN

0304-4076

Publication Date

January 1, 2011

Volume

160

Issue

1

Start / End Page

235 / 245

Related Subject Headings

  • Econometrics
  • 4905 Statistics
  • 3802 Econometrics
  • 3801 Applied economics
  • 1403 Econometrics
  • 1402 Applied Economics
  • 0104 Statistics
 

Citation

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Bollerslev, T., Gibson, M., & Zhou, H. (2011). Dynamic estimation of volatility risk premia and investor risk aversion from option-implied and realized volatilities. Journal of Econometrics, 160(1), 235–245. https://doi.org/10.1016/j.jeconom.2010.03.033
Bollerslev, T., M. Gibson, and H. Zhou. “Dynamic estimation of volatility risk premia and investor risk aversion from option-implied and realized volatilities.” Journal of Econometrics 160, no. 1 (January 1, 2011): 235–45. https://doi.org/10.1016/j.jeconom.2010.03.033.
Bollerslev T, Gibson M, Zhou H. Dynamic estimation of volatility risk premia and investor risk aversion from option-implied and realized volatilities. Journal of Econometrics. 2011 Jan 1;160(1):235–45.
Bollerslev, T., et al. “Dynamic estimation of volatility risk premia and investor risk aversion from option-implied and realized volatilities.” Journal of Econometrics, vol. 160, no. 1, Jan. 2011, pp. 235–45. Scopus, doi:10.1016/j.jeconom.2010.03.033.
Bollerslev T, Gibson M, Zhou H. Dynamic estimation of volatility risk premia and investor risk aversion from option-implied and realized volatilities. Journal of Econometrics. 2011 Jan 1;160(1):235–245.
Journal cover image

Published In

Journal of Econometrics

DOI

ISSN

0304-4076

Publication Date

January 1, 2011

Volume

160

Issue

1

Start / End Page

235 / 245

Related Subject Headings

  • Econometrics
  • 4905 Statistics
  • 3802 Econometrics
  • 3801 Applied economics
  • 1403 Econometrics
  • 1402 Applied Economics
  • 0104 Statistics