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Tails, fears and risk premia (2009)
| Venue: | JOURNAL OF FINANCE |
| Citations: | 17 - 0 self |
BibTeX
@ARTICLE{Bollerslev09tails,fears,
author = {Tim Bollerslev and Viktor Todorov},
title = { Tails, fears and risk premia},
journal = {JOURNAL OF FINANCE},
year = {2009},
pages = {2165--2211}
}
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Abstract
We show that the compensation for rare events accounts for a large fraction of the equity and variance risk premia in the S&P 500 market index. The probability of rare events vary significantly over time, increasing in periods of high market volatility, but the risk premium for tail events cannot solely be explained by the level of the volatility. Our empirical investigations are essentially model-free. We estimate the expected values of the tails under the statistical probability measure from “medium” size jumps in high-frequency intraday prices and an extreme value theory approximation for the corresponding jump tail density. Our estimates for the risk-neutral expectations are based on short maturity out-of-the money options and new model-free option implied variation measures explicitly designed to separate the tail probabilities. At a general level, our results suggest that any satisfactory equilibrium based asset pricing model must be able to generate large and time-varying compensations for fears of disasters.
Keyphrases
risk premia high-frequency intraday price risk-neutral expectation corresponding jump tail density rare event satisfactory equilibrium rare event account risk premium time-varying compensation general level short maturity out-of-the money option high market volatility tail probability expected value large fraction market index asset pricing model empirical investigation medium size jump statistical probability measure tail event variation measure new model-free option variance risk premia extreme value theory approximation
