Premium
Tails, Fears, and Risk Premia
Author(s) -
BOLLERSLEV TIM,
TODOROV VIKTOR
Publication year - 2011
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2011.01695.x
Subject(s) - econometrics , jump , index (typography) , economics , variance (accounting) , equity (law) , risk premium , variance risk premium , maturity (psychological) , actuarial science , financial economics , volatility risk premium , stochastic volatility , volatility (finance) , computer science , psychology , developmental psychology , physics , accounting , quantum mechanics , world wide web , political science , law
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.