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http://ssrn.com/abstract=614543
 
 

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Dynamic Estimation of Volatility Risk Premia and Investor Risk Aversion from Option-Implied and Realized Volatilities


Tim Bollerslev


Duke University - Finance; Duke University - Department of Economics; National Bureau of Economic Research (NBER)

Michael S. Gibson


Federal Reserve Board

Hao Zhou


PBC School of Finance, Tsinghua University

July 1, 2008

FEDS Working Paper No. 2004-56
AFA 2006 Boston Meetings Paper
Journal of Econometrics, Forthcoming

Abstract:     
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 indicate significant temporal dependencies in the estimated stochastic volatility risk premium, which we in turn relate to a set of underlying macro-finance state variables. We also find that the extracted volatility risk premium helps predict future stock market returns.

Number of Pages in PDF File: 31

Keywords: Stochastic Volatility Risk Premium, Model-Free Implied Volatility, Model-Free Realized Volatility, Black-Scholes, GMM Estimation, Return Predictability

JEL Classification: G12, G13, C51, C52

Accepted Paper Series


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Date posted: January 25, 2005 ; Last revised: March 13, 2009

Suggested Citation

Bollerslev, Tim and Gibson, Michael S. and Zhou, Hao, Dynamic Estimation of Volatility Risk Premia and Investor Risk Aversion from Option-Implied and Realized Volatilities (July 1, 2008). FEDS Working Paper No. 2004-56; AFA 2006 Boston Meetings Paper; Journal of Econometrics, Forthcoming. Available at SSRN: http://ssrn.com/abstract=614543

Contact Information

Tim Bollerslev
Duke University - Finance ( email )
Durham, NC 27708-0120
United States
919-660-1846 (Phone)
919-684-8974 (Fax)
Duke University - Department of Economics
Durham, NC 27708-0204
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Michael S. Gibson
Federal Reserve Board ( email )
Washington, DC 20551
United States
1-202-452-2495 (Phone)
1-202-452-6424 (Fax)
Hao Zhou (Contact Author)
PBC School of Finance, Tsinghua University ( email )
43 Chengfu Road, Haidian District
Beijing, 100083
China
+86-10-62790655 (Phone)
HOME PAGE: http://www.pbcsf.tsinghua.edu.cn
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